Stock markets across the globe have experienced a torrid time over the past year, amid fears over slowing growth in China, severe commodity price falls, and rising regulatory pressures on the banking industry.
Amid the turmoil many investors have favoured the perceived safety of high-quality growth stocks, favoured for their stable earnings, steady cash flows and often reliable dividends. Conversely, value stocks perceived to be lower quality and whose earnings are often reliant on the state of the economy have been shunned.
Funds focused on undervalued companies with unrecognised potential have therefore tended to struggle. The Majedie UK Equity Fund is a case in point. Over the past year, the UK team at Majedie have continued to top up the fund's exposure to out-of-favour areas, such as mining and financials, during times of share price weakness. While this positioning has impacted short-term performance, the team remain focused on businesses in which they believe value will ultimately be unlocked.
Within mining, the team believe the highest-cost producers will ultimately be driven out of the market. They have focused on companies that have cut capital expenditure and placed increasing focus on efficiency, productivity, and improving shareholder returns, such as BHP Billiton and Rio Tinto. They also feel a combination of lower demand and increasing supply will eventually come to equilibrium, supporting the prices of commodities such as iron ore. This should ultimately stabilise the outlook for companies in the sector.
In recent years, UK banks have rebuilt their capital requirements and now look far stronger than during the financial crisis. The team at Majedie suggest increasing regulation has forced banks to become more efficient. Their cost-to-income ratios have also fallen, which provides the potential for dividend payments to normalise in future (the lower the ratio, the more profitable the bank should be). Lloyds, HSBC, Barclays and RBS all currently feature in the portfolio.
Many investors have been put off telecoms given the heavily-regulated nature of the industry. However, the team believe regulation across the UK and Europe is becoming more accommodating, while the sector is also undergoing a period of consolidation, which could encourage further investment in technology and infrastructure. Growth in data usage should also prove a boon to these companies.
An investment in Tesco has been painful to performance and the team admit they underestimated how long it would take for the supermarket to turn around to full health. They now believe the company is on track for a recovery. WM Morrison is also held, which the team believes is in a unique position thanks to its vertically-integrated supply chain (meaning the company owns its suppliers, helping to reduce costs and improve efficiency).
Our view on this fund
The Majedie UK team invest with a contrarian tilt, aiming to identify positive trends and changes before others do. We would therefore expect the fund to go through shorter-term periods of underperformance at times. Indeed, the team have occasionally been early with their views and in repositioning the portfolio, yet in most cases investors have ultimately been rewarded for their patience.
This fund is currently positioned quite differently to many other UK growth funds, and also invests in higher-risk smaller companies, meaning it could dovetail well with funds with a greater focus on larger companies and more defensive areas of the market. Its focus on underrated areas of the market could bear fruit once they return to investors' favour.
We maintain our long-term conviction in the fund and in the solid and experienced UK team at Majedie. The fund remains on the Wealth 150 list of our favourite funds across the major sectors.