Although the UK remains unloved among both domestic and international investors, it is possible that good businesses will still thrive, according to fund manager Nick Train.
Data from Bloomberg shows that the FTSE All-Share trades on 10x earnings, while the MSCI World Index is trading on 18x and the S&P 500 on 22x.
As a result, investors may wonder whether the UK market is currently offering a once in a decade opportunity or is simply a moribund value trap.
The manager of the Lindsell Train UK Equity Fund said that he wants to believe the former, but remains cautious as markets can stay cheap for a very long time.
He said: “When a market is as out of favour as the UK, there is an increased or improved chance of identifying wonderful companies that are wrongly priced and that, over time, if you own shares in wonderful companies, wrongly priced, you can earn potentially exceptional returns, even if the UK market as a whole remained out of favour.”
Train mentioned cloud-software provider Sage as an example of a UK business with a global presence, “world class” revenues and high levels of cash generation. However, the company trades on a lower price-earnings (P/E) ratio than its closest US competitor, Intuit.
Sage is not the only strong UK business to trade on lower P/E ratios than their American peers.
Train added: “It is not contentious, in my opinion, to argue that Burberry, Diageo, Experian, Fever-Tree, Hargreaves Lansdown, London Stock Exchange Group, RELX, Schroders and Unilever have been outstanding businesses, at least in the past.
“Certainly, they all meet the only post hoc definition of outstanding that really matters – owning their shares for long periods has made investors lots of money.”
P/E ratios of UK businesses vs US competitors
Source: Lindsell Train
While he acknowledged some UK businesses might not be as outstanding as their rivals, Train said that the valuation of US and UK firms is wide and getting wider at an index-level.
He added: “There must at least be the possibility that our holdings could become more valued if they continue to make good business progress.”
Performance of fund in the second quarter of the year vs sector and benchmark
Source: FE Analytics
The manager delivered negative returns in the second quarter of the year, but still performed better than the FTSE All-Share and the IA UK All Companies sector.
US technology businesses – perceived as beneficiaries of developments in artificial intelligence (AI) – had strong share performance over the period. As a result, the best performers in Train’s fund were the stocks with strong AI credentials, according to the fund’s latest monthly factsheet.
He said: “Sage is one of them, providing productivity-boosting AI tools to small and medium sized businesses. Others include Experian, up 16%, LSEG up 7%, RELX which outperformed the FT All-Share during the second quarter with a marginal gain of 1.6%, and even Hargreaves Lansdown, which was up 2%.
“Combined these investments make up the biggest proportion of the fund and we hope they will continue to participate in any AI bull market.”
Shares in the luxury industry such as Burberry and Remy Cointreau were the weakest performers. This is because investors anticipate a slowdown of demand for their products.
Train added: “We understand why some investors might attempt to time their holdings or the size of their holdings in these companies, but to us the calibre of the brands, their demonstrable historic and current pricing power, and the prospect for secular future growth in demand for their luxury products worldwide make them core, long-term investments.”