For some time now the UK market has trailed world stock markets. It is currently trading at a 40% discount to the MSCI World Index.¹ There are several reasons for this. One is that the old economy stocks that largely make up the leading index are out of fashion. Wealth manager consolidation and pension funds are now largely driven by centralised models, in part because of increased regulation, with the result that portfolios are being constructed to a benchmark, as dictated by business decision making, rather than stock selection. I can remember a time when at least half a balanced pension portfolio would consist of UK equities and even recently stockbrokers favoured a much greater weighting to the UK.  But because the S&P 500 now makes up around 70% of the MSCI world index and the UK just 3%, the trend has been to ditch the UK.  Even the new Robo and passive advisers are getting in on the act and advising investors to reduce UK weightings.

Of course, deeper pools of investor cash and a friendly attitude to business are two of the reasons some companies are looking to the US to list.   There are many ways the UK Government could alter this but that’s an article for another time and the solution is not raising the limit on ISAs.

At EXE Capital we are not interested in where a company is listed. We concentrate on conviction managers who identify great companies regardless of their location. Two investment managers who fully understand this are Nick Purves and Ian Lance who took over the reins at Temple Bar Investment Trust in 2020. (For those interested, this trust was set up in 1926 as the Cable, Telephone and General Trust Company Ltd, established to invest into North and South American telephone companies, before adopting its current name in 1977).

Nick is well known to both Andrew Humphries, chair of our Investment Committee, and me, as he is currently the longest serving manager at St. James’s Place. Over the last 23 years, Nick’s open-ended fund has returned twice the return of the FTSE All Share Index proving that good stock picking does work.² That track record has been extended to the investment trust since their appointment.

Despite there being plenty of great companies within the UK run by good managers who have been increasing profits, their share price hasn’t followed suit. This neglect by investors has resulted in the managers buying back their company shares in an effort to create demand. By all accounts 50% of UK companies have bought back their shares in the last twelve months which is higher than any other market.

What does this mean for investors? Simply, that buying back shares  reduces the number of shares in circulation which in turn increases the earnings per share and the dividends that can be paid per share. The UK currently offers the highest total yield globally at around 6.1% compared to 3.2% for the US.³ That is the dividend yield enhanced by the higher yield achieved because of the diminishing number of shares in circulation.

There are plenty of good examples of the effectiveness of buy backs done by companies with strong balance sheets. One firm that Nick refers to is BAT, a company he has previously owned. Back in 2000 technology companies were highly sought after whilst old economy stocks were of little interest to investors. BAT’s share price was then £3, but in 2016 it had risen to £50. This translated into a total return to shareholders in excess of 20% pa. What was remarkable about this was that their sales growth was just 2% per annum. But they had great cashflow and nothing better to spend it on, so they bought back their shares.

We’ve long admired Nick and Ian and are pleased that they can now run money under the structure of an investment trust because of all the unique features that it offers, such as the ability to smooth dividends and employ gearing. Whilst their focus is on UK listed companies, they do hold 30% overseas.  The fund acts as a diversifier in as much as it holds old economy companies such as energy, mining and financials which they fully believe will have their day again.

As to the double discount?  Firstly, the UK is trading at that significant discount of 40% to the world market. Incredibly the funds’ average p/e ratio is around 8%. Secondly, Temple Bar’s share price is currently trading at an 8% discount to its Net Asset Value, the underlying value of its holdings.

The views are those of the author only. The above does not constitute a recommendation to buy the fund and advice should be sought from your financial advisor as to the appropriateness of this fund in your portfolio. The value of investments can fall as well as rise.

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¹ Source Redwheel, Morgan Stanley as at 31/12/2023

² Source Redwheel, Bloomberg as at 31/12/2023 Gross of fees.

³ Morgan Stanley 31/12/2023

Source material for article taken from AJ Bell presentation by Nick Purves 03/24

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