Soon after this interview happened, Invesco Perpetual’s long-standing head of equities Neil Woodford surprised the world by announcing that he was going to leave the company next year and go solo.
But it seems that Martin Walker already has a strongly independent view of how to invest the Dublin-registered UK Equity Fund he runs, compared to high-profile Woodford.
“To be fair to Neil, he wields his power lightly. I’ve got a very different stance from him at the moment and if I were to highlight differences it would be fair to say that I am probably more of a bottom-up investor than Neil and he has a stronger macro top-down perspective.
“I’m also more optimistic on the global macro outlook than Neil is, and I think that probably leads us to fairly different investment conclusions.”
That translates into many examples of different stock picks and sector plays, amounting to a 28% stock crossover between Walker’s portfolio and Woodford’s well-known income fund, as he explains:
“I own Rio Tinto and GKM, Neil doesn’t. He owns Centrica, I don’t. Neil has big holdings in pharmaceuticals, I have a significant weighting in pharmaceuticals but nowhere near as big as Neil’s, and I barely hold any tobacco anymore,” he says.
On the fast track
When Walker first joined Invesco Perpetual in 1999 (Perpetual as it was then), he worked as Woodford’s investment analyst getting involved in specific projects for him, in effect a trainee fund manager role. He started managing money in March 2003 and took on the onshore Invesco Perpetual Children’s Fund, which he still runs today having built up a 10-year track record.
The UK Equity Fund became his responsibility in June 2008, inheriting it from veteran fund manager Ed Burke, and he now has a five-
year track record under his sole management.
The internationally marketed Dublin version of this fund is effectively an offshore clone of the UK Growth Fund, which he also runs, and that contributes to a chunky total of £1.75bn assets under management (as at 30 September) that he looks after for Invesco Perpetual.
These pooled vehicles include Invesco Perpetual Children’s Fund, UK Aggressive Fund, UK Growth Fund, as well as the Invesco UK Equity Fund and equity sub-portfolios of some pan-European equity funds.
Originally, a large part of the international client base of the Dublin UK Equity Fund was Channel Islands-based money. Latterly, the geographical spread has become wider, to encompass Ireland, and pan European including Cyprus, Luxembourg, Switzerland, France, Belgium, Netherlands, Germany, Austria, Italy, Norway, Spain, Finland and Sweden. In Asia, the spread of countries include Singapore, Macau, Hong Kong, and Taiwan.
A learning curve
A key market event over the past five years that Walker had to deal with was as a shareholder in HBOS during a bank run.
“Frankly, it’s not the moment of my life I’m proudest of. It taught me quite a lot and I can still remember the mistakes I made there. It was quite a formative experience and one I fully intend not to re-live.”
The lesson here derived from a painful understanding of what the gearing in a banking business model means, in terms of both the earnings line and also balance sheet.
He realised just how quickly things can go wrong and “you can find that your equity gets extinguished to nothing very, very quickly”.
It so happens that his fund’s top sector weighting is in financials at the moment, one of the main reasons for which is the way it can give a geared play on markets.
But he is mostly not holding bank stocks, the exception being a reasonable sized position in HSBC, at 4.5% of the fund. The majority of the financial holdings are in life assurance, general insurance and asset managers.
New year’s Resolution
“I am upbeat on the prospects of the market going forward. Bear in mind that these positions were built 18 months ago when the market was a lot lower, and my fund is up over 60% on a three-year view.”
He says it is perfectly possible to earn reasonable returns in the region of 8% going forward. “Compared to most other asset classes that’s still an extremely attractive return. I think we’ll see further flows into equities, which is one of the reasons I own a couple of fund managers, Schroders and Jupiter.”
Resolution is another holding which Walker feels is an interesting example of a company that is in the process of restructuring but also where the market is only just starting to understand the opportunity.
“Bear in mind that this business is still trading at a 30% discount of its embedded value, where embedded value is net asset value plus a discounted value of the in force business, making assumptions for things like persistency.
“Resolution has the number two position in the UK group pensions market, and what I do know going forwards is that there will be more defined contribution schemes, which will be administered by people at Resolution.”
His logic behind more members of defined contribution schemes is because of auto-enrolments. Each month those members will pay an amount into the funds of Resolution, and over time, equity markets have a habit of going up.
“In a way this is like looking at a fund manager, with almost guaranteed, mandated inflows, which is a position that Invesco would love to be in. Therefore, there is a significant value, in my view for the new business franchise. The market hasn’t got there yet but I think it will.”
A smart consumer
Moving on to the consumer discretionary sector, the fund’s second highest sector weighting, this position reflects Walker’s optimism over the past 18 months that household cash flows would start to improve.
“I have no interest in buying Marks & Spencer or Debenhams where it’s just a vanilla story. What I want to do is combine a macro core here with some microeconomic stock specific opportunity. So, for example, I’d like to be in N Brown, which is an online and catalogue retailer of outsized clothing, which is an increasingly growing market segment, no pun intended there.”
He also picks out Dixons, where in addition to a more benign macro backdrop, there’s also significant internal restructuring going on to make it competitive versus the internet.
The average holding period for stocks is between three and five years. “There are some that will enter the fund and exit more quickly, either because the idea has worked and I deem there to be no value there anymore, or because I’ve changed my mind for whatever reason, and backed out of the whole thing.”
The most recent purchase on the fund is UBM, formerly known as United Business Media, whose shares Walker says have been under a cloud as people have worried about Chinese economic growth. The majority part of the business (80%) involves organising events in Asia, which gives the stock attractive cash generation characteristics.
Underdog to wonderdog
As a pragmatic investor, the discipline he imposes on himself is that the assets must be undervalued when he buys them.
“I am consistently looking for sectors that have been left behind by the market or that are misunderstood by the market. I’m trying to explore market inefficiencies. My key advantage of being able to do that is that Invesco as a house are very supportive of a long-term investment approach.”
Where Walker has a longer-term view, he is prepared to live with short-term underperformance for the longer gain. Another aspect of his investment approach is that there are no stocks he would exclude just because he does not like the macroeconomic picture.
“It’s about bottom up, so really to have a view on UK equity markets you need to have a view on two things, valuation and where you think earnings are going.”
As for the outlook, his view is that the UK market is “broadly fair value” with a PE of 15 times earnings: “It may get expensive from here. I’m not assuming that will happen, but I do think that the market can grow its earnings 7% or 8% pa at least, certainly in the medium term, assuming no new macro apocalypse befalls us.”
A power trip
And by the way, Walker agrees with Neil Woodford’s strong response to Labour leader Ed Milliband’s announcement that he is going to fix
gas and electricity prices if the Labour party wins power at the next election.
“The point that Neil made is that, irrespective of who wins the election and what ends up happening, this has raised the risk profile of the sector. If investors, such as myself, are going to invest in the UK, we are going to demand higher returns to compensate for the risk. So, in a way Miliband’s plans are self-defeating.”
