Crooke has been angling the £689 million global trust away from its relatively heavy weighting to the UK and is optimistic about prospects for European markets in 2015, boosted by the European Central Bank’s (ECB) €1.1 trillion money-printing programme.
But he said he was surprised at how quickly markets had rallied since ECB president Mario Draghi announced the bond-buying blitz at the beginning of the year. The MSCI Europe ex-UK index is up 14.6% since the start of 2014, although only 7% up in sterling terms due to the impact of a falling euro.
QE will begin this month, and the ECB is meeting to discuss details of its programme today.
‘What’s holding me back a bit is the markets have got ahead of themselves,’ said Crooke. He argued that while QE would boost the region’s markets, the US’s experience with money-printing showed ‘it does take a bit of time to get things going’.
Those holdings lost 1.4% over the trust’s financial year to the end of October, as Stevenson’s focus on higher quality stocks meant it missed out on some of the recovery from companies in Spain and Italy. Since that period, however, the portfolio has benefited from its heavy weighting to Swiss stocks, which make up 31.8% of the European portfolio, thanks to the surge in the Swiss franc when its cap against the euro was removed.
Selling UK shares
Crooke (pictured) has been selling off some of the trust’s UK holdings as he edged the trust towards more overseas exposure. The fund’s 39% weighting to the UK is still relatively high compared to its peers in the Association of Investment Companies’ Global sector, but has been steadily reduced.
He sold some of the trust’s defensive holdings such as utilities Drax (DRX) and National Grid (NG) due to fears over their dividends, and cut some GlaxoSmithKline (GSK) exposure after strong performance from the pharmaceutical giant. The fund’s third-largest holding, insurer Catlin (CGL), is meanwhile about to be bought by US rival XL (XL.N) meaning the 1.8% of the portfolio it accounts for now counts as a ‘quasi cash’ holding.
But the dividend flow from some of the trust’s UK stocks means there are plenty of reasons to keep a strong domestic weighting. Crooke cited impressive payouts from specialist insurers Hiscox (HSX) and Lancashire (LRE) and Jupiter Fund Management (JUP). Bankers yields 2.5% and targets regular dividend growth.
US exposure now stands at a quarter of the trust, up from a fifth at the end of 2013. The trust’s relatively low exposure to the world’s largest economy had weighed on performance over the last financial year, and Crooke admitted the US rally had taken him by surprise. ‘It was a very odd year,’ he said. ‘I didn’t expect it to happen that the US would “gap out” like that.’
US style switched
But the bigger change has been the trust’s overhaul of its US strategy at the beginning of last year. A new manager, Ian Warmerdam, has been appointed to the US portfolio and a new approach – ‘growth at a reasonable price’ adopted, replacing the trust’s previous value style.
Crooke will be hoping the change will address the trust’s historic difficulties with investing in the US. Over 10 years, the fund has outperformed in each of the major markets it invests in, apart from America, although Bankers is far from alone in that regard.
‘The US is the one [market] we can’t outperform in,’ said Crooke. ‘Very few managers manage to outperform that market.’
Warmerdam has added a more ‘growthy’ feel to the portfolio, although Crooke added the trust wouldn’t be forced to pay over the odds for stocks – sometimes a feature of pure growth investing.
‘The US portfolio is still below the market’s price-earnings ratio, but it’s got a more growth feel to it,’ he said. While a value investing style can deliver in the US and Europe, the approach was ‘out of favour’ in the US, he said.
Among the trust’s top US holdings is Apple (APPL.O), and while Crooke said his team suffered some jitters over the leaks before the launch of the technology giant’s iPhone 6, he was unfazed by the stock’s record valuation.
The trust cut a big chunk of its exposure to the stock as the leaks emerged last summer, followed by ‘bendgate’, when customers complained the phone bent too easily, but as the success of the product emerged Bankers bought back in.
‘There are always issues around new launches but it is a darling of the consumer,’ said Crooke.
Green light for China
Chinese stocks now make up a bigger chunk of the portfolio, after the trust was granted permission to invest in mainland A-shares of the country. That has given the fund greater opportunity to benefit from the growth in middle-class income in China, according to Crooke, in contrast to the more export-focused Chinese companies listed in Hong Kong.
And while China’s slowing growth was having an impact on exports, Crooke said domestic growth powered by a rise in incomes was still buoyant and valuations compelling.
‘It’s a very cheap market – the Chinese pumped the shares up in 2006 and they fell away sharply. A lot of very decent companies got very cheap – you can find single figure price earnings ratios.’
Chinese stocks snapped up for the trust’s Pacific ex-Japan portfolio, run by Michael Kerley and Charlie Awdrey, include Daqin Railway (601006.SS) and car marker SAIC Motor (600104.SS).
China is also set to be one of the big winners from a low oil price. Crooke said he saw the oil price remaining at low levels, and has a relatively low exposure to oil stocks in the portfolio, although BP (BP) is the top holding. He kept hold of his BP shares, and a stake in Shell (RDSb) as the oil price plunged last year, and said he could look to top up should the shares dip further.
While dividends at both have held up, an oil price that bumped along at the $50 to $60 level over the next two years would put those payouts under pressure, said Crooke, although he believed a modest rise towards $70 was more likely.