Wednesday 13 December 2017

Top stock picker is keeping it local with pub chains, home builders and bakeries

Kevin Crowley

PAUL Spencer, Britain's best stock picker over the last five years, likes to stay local. The 45-year-old money manager lives in Halifax, northern England, where he was born and works less than 15 miles away in Leeds.

Having beaten rivals by betting on stocks that get most of their earnings from overseas in 2010, Mr Spencer says now's the time for investors to return home.

As the economy shrinks, inflation climbs and policy makers consider raising interest rates, he's buying pub chains such as JD Wetherspoon and house builders such as Bovis Homes. Other managers at BlackRock and Old Mutual disagree.

"Many UK stocks are already pricing in a very, very bleak environment so anything slightly better than that could give some of these domestic-facing stocks quite a lot of scope to perform well," Mr Spencer said in an interview at his office in Leeds. "I've probably taken a contrarian stance here."

Mr Spencer has run Rensburg Fund Management's UK Mid-Cap Growth fund since 2006 and has returned 86pc since then, beating all other UK equity funds with assets of more than £350m (€412m), according to Morningstar.

The £390m fund, which invests in FTSE 250 stocks, has also outperformed all its rivals, including Fidelity International's Special Situations Fund, formerly run by Anthony Bolton, over three, five and 10 years. The FTSE 250 is made up of UK firms with a market value of £100m to £3.4m.

An investment of £10,000 in Mr Spencer's fund five years ago was valued at £18,600 as of last week, compared with £12,700 for the average UK equity fund, according to Morningstar, the Chicago-based fund researcher.

The same investment in a fund tracking the FTSE 250, Mr Spencer's benchmark, was worth £12,630.

Mr Spencer said he pays little attention to macroeconomic forecasts. "Market forecasters only exist to give astrologists a good name," he said, paraphrasing economist John Kenneth Galbraith, author of 'The Great Crash: 1929'. Instead, he says he picks stocks he considers are undervalued by the market.

About half of Mr Spencer's fund is now made up of UK firms that get most of their revenue at home, compared with about 40pc in the third quarter of 2010. The balance is made up of stocks that get the majority of their earnings from overseas.

Mr Spencer made the change late last year as the UK economy shrank 0.5pc in the last three months of 2010 and inflation accelerated to near double the Bank of England's 2pc target.

"I can find businesses trading on valuations that presume life will remain pretty tough and in some cases get worse for a few years," he said. "You've got an opportunity to buy businesses whose price expects no upside surprises whatsoever."

Mr Spencer studied economics at Nottingham University and in 1987 joined Battye, Wimpenny & Dawson, which later merged with Rensburg.

His open-plan office overlooks the Leeds-Manchester canal, a relic of the city's 19th century industrial heyday.

Canal Wharf, as the area is known, was gentrified in the 1990s and now hosts thousands of newly built flats as well as Wal-Mart Stores Inc-owned Asda's UK headquarters and a shopping centre. The father of two boys says UK consumer stocks may be in line for a similar revival.

Pub chains, house builders and some retailers have fallen so much they present a good opportunity to benefit should Britain's economy rebound more quickly than expected, Mr Spencer said.

He now owns pubs with low debt such as JD Wetherspoon and Mitchells & Butlers and firms with high levels of cash reserves including house builders Bovis and Persimmon and Greggs, Britain's biggest bakery chain.

"I'm not expecting a Phoenix-type recovery from the UK," he said. "Quite the opposite. Things will be very, very tough. But there comes a valuation point at which you say, 'is this factored in?"

Mr Spencer posted a 32.6pc return last year, beating his benchmark FTSE 250 Index by 3.5pc points and more than 80pc of his rivals after investing in engineering firms such as Weir Group and Spectris, which get most of their earnings from outside the UK.

Both firms have risen by more than 50pc in the last six months. That growth is unlikely to continue, Mr Spencer said.

"We felt there was a very, very crowded trade participating in overseas earners," he said. "If there's the slightest slip up in emerging markets or demand from China, how quickly will these stocks fall?"

Mr Spencer fears a rate rise would hurt his investments. "I'm hoping the MPC errs toward the growth bias rather than trying to act to damp down inflation," he said. "The elements that are prompting inflation at the moment aren't going to be influenced by rate rises: Food and fuel and tax increases. Putting rates up wouldn't have any great influence on any of those items."

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