Average cash balances across global portfolios were 4.8% in September, according to a monthly survey designed to take the temperature of professional investors’ attitudes to the market.[1]  

Elsewhere, an increase in cash weightings held by non-discretionary investment firms in the UK has come to the FCA’s attention. The regulator has warned CEOs of firms currently gaining interest from bloated cash balances that it is keeping a close eye on their behaviour. It says many client portfolios still contain a higher weighting to cash due to them pulling out of riskier assets during the COVID-19 induced sell-off earlier this year.

While the ability to hold cash in times of market volatility is vitally important, once that instability subsides, cash weightings become an indicator of how confident a fund manager is in their asset class.

We firmly believe actions speak louder than words, which is why the cash allocation in our UK equity fund is right at the bottom of its range – just 1% at the end of August. Put simply, we are fully invested because we are excited about the outlook for UK equities and believe there are currently some great UK businesses trading on material discounts to their ‘real’ value.

Down but not out

Before going any further, I must address the elephant in the room – everyone hates us (the UK) right now. I am exaggerating (only slightly) but the international perception of Brexit is overwhelmingly negative, while the UK has also not covered itself in glory during the COVID-19 pandemic.

As such, the FTSE 100 is the worst performing major global index this year and UK equity funds have suffered outflows throughout 2020, with an outflow of £2.6 billion in August alone.[2]

So why am I excited about (some) UK equities? Firstly, I believe that being a contrarian can reap rewards when done diligently, with close attention paid to the risks at hand. Secondly, we at Church House invest in businesses not countries. We spend the overwhelming majority of our investment time analysing the quality of an individual business rather than attempting to guess the economic/political/social outlook of the country in which that company happens to be listed in.

The FTSE 100 is heavy on old-world price takers, such as oil and gas majors, banks and miners, and lacking in genuinely innovative businesses, such as tech and healthcare. Thankfully, we are in the lucky situation with our UK Equity Growth Fund that we have no requirement to own these crumbling UK giants and can, instead, cherry-pick the best of British with the addition of up to 20% in international businesses on top of this.

Happily, there are still plenty of examples of genuinely innovative and exciting businesses based in the UK. The country has some of the best universities on the planet, the rule of law applies, and money has never been cheaper. On this last point, UK interest rates are, of course, at all-time lows but the key element for us is that credit spreads are also historically tight, indicating that investors are happy to lend to corporates on favourable terms. These should be ideal conditions for incubating growth.

Beyond the blinkers

I believe the current unpopularity of the UK as a nation is leading global investors to overlook some truly great international businesses that, for historical reasons, just so happen to be listed in London. To ram this point home, here is the revenue split of our top three investments:

1. RELX: 56% North America, 16% Europe (ex-UK), 21% Rest of World, 7% UK
2. Unilever: 46% Asia, 32% Americas, 22% Europe (UK not individually disclosed)
3. Halma: 38% USA, 21% Europe (ex-UK), 16% Asia, 16% UK, 5% Africa and Middle East, 4% Other

My point here is clear: these are truly international businesses. In my opinion, the outcome of Brexit will have little effect on how many scientists subscribe to the Lancet (published by RELX), how many people eat Magnum ice-creams (made and sold by Unilever) or how many buildings are required to have fire sprinklers (manufactured by Halma).

These global businesses have global peers and it is interesting to see that many London-listed names are trading on discounts to similar companies listed in Europe and the US. To pick just a few examples: Diageo currently trades on 23x PE in London, while Pernord Ricard is on 25x and Remy Cointreau is on a whopping 58x (both listed in Paris). InterContinental Hotels Group (London) is on 38x, against Hilton on 55x and Marriott on 54x (both listed in New York). Unilever is on 21x versus Nestle on 25x. The list goes on and my point applies across many industries: strong global businesses listed in London look undervalued against their peers.

The key here is to look for leading businesses with long-term structural tailwinds at their back rather than focusing on shorter-term or temporary factors. Only by doing this will the prospect of becoming fully invested start to look exciting again. After all, shares in these great businesses will not remain cheap forever.

Fred Mahon is co-manager of the Church House UK Equity Growth Fund

[1] The Bank of America Global Fund Manager Survey, September 2020, surveyed 190 fund managers running a total of $601bn.

[2] Morningstar Data