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Will Labour’s landslide election victory be the catalyst to bring the UK stock market back from the dead?
After five years of underperforming the rest of the world, both the FTSE 100 and FTSE 250 have perked up in the past 12 months, with the indices rising a respective 13pc and 16pc in price terms, not including dividends.
The jury is out on whether Chancellor Rachel Reeves’ plan to attract billions in infrastructure investment through the National Wealth Fund will bring undervalued UK equities in from the cold after nearly three years of divestment by investors.
The question is: will Labour’s huge parliamentary majority bring the stability that investors crave or will the party hit them with the tax rises that its Conservative opponents claimed it would?
With so much uncertainty, this column is looking for fund mangers who not only know how to buy good shares cheaply but can get their hands dirty and create value even when stock markets are subdued.
One such is Phoenix Asset Management Partners in west London. This column has monitored its progress since the firm, led by Gary Channon, a former bond trader turned value investor, took over the Aurora investment trust in January 2016.
At the time, Aurora was the UK’s worst-performing fund but Mr Channon promised to revive its fortunes, phoenix-like, by investing its assets in a small number of intensively researched stocks he believed to be trading well below their “intrinsic value”.
Mr Channon achieved this aim with the now £202m portfolio, which includes big holdings in sports retailer Frasers Group, house builder Barratt Developments and – unusually for a UK equities fund – Netflix, the US streaming service.
It has also disclosed a new stake in Hargreaves Lansdown, the investment broker whose shares have shot up 55pc this year on a £5.4bn approach from private equity bidders.
As of the end of June, that had helped Aurora generate a total share price return of 80.7pc since Channon took over, falling just shy of the FTSE All Share’s 86.2pc return over the same period.
The difference reflects the discount to net asset value, at which they have traded for the past three years as the UK stock market fell out of favour.
We tipped Aurora in November 2018 at 202p, encouraged by the fund manager’s high-conviction approach and his firm’s unusual performance-only fee. Phoenix only gets paid if its underlying annual returns beat the FTSE All-Share, with the money subject to a clawback over three years if the gains are subsequently lost.
Since then, the shares have generated a 43.1pc total return, just ahead of the All-Share’s 41.9pc. .
We were reminded of Mr Channon’s success last week when shares in another of his funds, Castelnau, soared 30pc over election week. This was in response to news of a 46pc increase in the value of Dignity, the funeral services group which Mr Channon and Direct Line founder Sir Peter Wood took private over a year ago and which accounts for the bulk of its £312m size.
Using surpluses from the £1bn trust that Dignity operates for customers saving for funerals, the company has repaid £100m of its £540m debt pile.
This is the first sign of progress in the turnaround of Dignity, which slumped to a £10m loss in 2022 but is back in profit. Responsibility for streamlining and repositioning the business, while exploiting its property estate, passed to Zillah Byng-Thorne, the former Future publishing boss who became chief executive last month.
At 97.5p, Castelnau shares are a fascinating investment, virtually back to where they started nearly four years ago but with plenty of upside if Dignity’s resurrection goes to plan. Mr Channon has said the investment company could be worth £4.36 a share if Dignity fulfils its potential.
However, the other smaller businesses in this special situations fund – including Strand Collectibles, the former Stanley Gibbons stamp dealer, Hornby, the model train maker, and Rawnet, a digital marketing agency – are not doing so well.
Nevertheless we view Castelnau’s revaluation as an endorsement of Mr Channon’s approach and reiterate our belief in Aurora, which is 13.5pc invested in the sister fund, giving it a decent exposure to Dignity amid a more balanced portfolio that the manager believes could grow a further 130pc before being fairly valued.
Questor says: buy
Ticker: ARR
Share price: 263.5p
Gavin Lumsden is editor of Citywire’s Investment Trust Insider website
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