Asset allocators who view the UK as legacy market are behind the times, suggest Rachel Reutter and Michael Ulrich, co-managers of J O Hambro’s UK Opportunities Fund. The market offers a rich opportunity set for active UK managers.
It’s too easy to see the UK as a legacy market, its companies the ageing grande dames of days gone by. The reality could not be more different. For a well-seasoned stock picker, it’s a market bristling with new technology and global opportunity.
“Kindly do not attempt to cloud the issue with facts,” says George Banks, the austere bowler-hatted, umbrella-carrying epitome of a city gentleman in Mary Poppins. Banks’ image continues to define many people’s impression of the City of London and of the stocks traded on the London Stock exchange; companies with centuries of history, where tradition rules over innovation and where a box of fine cigars sits atop a heavy oak table in every boardroom. Ask a layperson what sort of businesses dominate the UK share market, and the response will too often be a firm that traces its origins to very beginning of the industrial revolution, such as a high street bank or something to do with tobacco. In an admirable display of consistent transparency, Prudential publish annual reports for every year going back to 1867 – a year in which the directors complained of “unexampled commercial depression”.
In recent years, the stellar performance of Silicon Valley tech disruptors seemed a world, or at least a continent, away from the perceived stuffiness of the London Stock Exchange. The fashion is for businesses with two years of history, not two hundred; for roll-neck jumpers and baseball caps rather than bowlers and ‘brollies. However, those who persist with this outdated view of the UK market are following in the very footsteps of Mr Banks. Allow us to attempt to uncloud the issue with some facts.
The FTSE 350 index in number terms has more than twice as many technology stocks than it has banks, twice as many healthcare companies compared to life insurers and 40% more media companies than oil producers. However, merely counting the sector constituents only reveals half the story. Investment in digital platform technology is now a necessary part of transacting business. Regardless of their designated sector, the best London-listed businesses have built saleable digital platforms that underpin their operations. Next’s online profits dwarf those from its high street retail operation and have enabled it not only to be the largest online seller of clothing in the country, but one that has seen growth of 16% per year for the last five years. Investors looking for data-rich technology businesses can find both Experian and Relx on the London bourse, both with market leading datasets and state of the art AI analytics. The digital media platform of Future Plc was described to us by a media buyer as “industry leading”, despite the company being based in Somerset and not San Francisco.
The UK market boasts an increasing alignment with today’s enduring growth themes. SSE is building Europe’s largest offshore wind farm and Johnson Matthey has a 40% share in the supply of catalysts for hydrogen production. It includes some of the world largest miners of materials essential for energy transition (copper and cobalt). The UK boasts two of the world’s largest pharmaceutical companies and numerous other medical device and research businesses. Our industrial sector contains companies at the heart of emissions reduction (such as IMI) and in energy efficiency (including Smiths Group). In the financial sector, for every bank with 200 years of history, there are disrupters such as Hargreaves Lansdown.
The UK remains the most global of domestic stock markets. Companies that started from humble beginnings in the UK have become international leaders. Ashtead started as a small Surrey-based plant hire company and is now the second largest such business in the US, having grown North American revenues over 14% per year for a decade. HomeServe, which started by providing plumbing insurance for customers of South Staffordshire Water now derives around more than two thirds of its profits from its fast-growing US and European businesses. Even Serco, a company heavily associated with its UK contracts, now boasts significant contracts with the US Navy, making North America its largest profit contributor.
This all provides a rich opportunity set for active UK managers and one that is not well understood by many asset allocators. Closer examination of the UK stock market reveals it to be a market with a truly global reach, leading technology and benefiting from enduring tailwinds. Asset allocators need to remove the clouds of misperception and focus on the facts.