Fund manager update: Richard Colwell

How does that feed in to constructing a portfolio?

I want to be different from the index, and other funds, and therefore being contrarian is a useful way of trying to think a few snooker shots ahead of the crowd. 

But you can’t just mechanically fill a portfolio full of all the stocks that look cheap and just hope for mean reversion at some point in the future. If you do that, you’re in danger of becoming over-indexed into all the structural headwinds, and you could run out of bullets. 

But at the other extreme, if all you chase is the popular glory stocks, then it’s a warm bath for a while – but rotation happens in markets very quickly. You don’t want to be one-dimensional in putting a portfolio together.

When those contrarian stocks do improve, then the double counting of the rerating is great, and you don’t want to give up that lightly. You don’t want to be an inverted snob and sell them too early, but you’re eagle-eyed to make sure those companies don’t get side-tracked and start doing things they didn’t say they were going to do. 

It’s a big mistake for investors to tryand pursue perfection in their portfolio.If you want every fund and every stock that you own to be performing well at any one time, you’ll be chasing your tail. Most of the better investments we’ve done started out life as real difficult situations, which detracted from performance for a number of years. 

The phrase is that opinions follow share prices. So, if a share’s going down, it must be a rubbish company, disgusting, got no chance. But it’s ever thus, and in a few years’ time perceptions could change, you could navigate through it. You don’t necessarily have to be a brilliant business, but if you’re priced for relegation, if you can survive on the last day of the season with a cheeky draw then that’s a useful upside isn’t it? It’s not all about trying to find the next Arm or the next Apple, it’s not all about growth and vision. 

Everyone’s saying the UK represents extraordinary value, but they’ve been saying that about Japan for the last 20-odd years. And Japan’s Nikkei index is still about 60% off its peak in 1990. Isn’t there an argument for giving up on the UK at this point?

I hope not. I’m out of a job if that’s true! Confidence is certainly being tested, and people are finding it hard to visualise light at the end of the tunnel. But there’s no reason to be apologetic about being invested in the UK stock market. Yes, we haven’t got sexy, mega-cap US tech, but there are a lot of really good businesses – world-class businesses – and they’re not all beholden to the UK’s economy. The dislocation in valuations compared to their peer group listed in other exchanges is extreme.

Let’s talk about BT. How does your diagnosis of BT lead you to the current position that you have in the company?

There’s obviously been lots in the press on this. The management are as vexed and frustrated as us shareholders that the value of the rump, Openreach, is worth well north of the current share price, let alone the rest of the business. And it goes back to the earlier question: how can a board try and close the gap between intrinsic value and the share price? 

And that’s probably why you’re reading rumours of maybe they’re considering third-party investments from infrastructure funds into Openreach, as a way of the look through valuation, and shining a light on that as well as helping with the pension funding.

Who knows whether that will ever come to pass or not? But there’s a lot of value there. 

The uncertainty is that you’ve still not had full clarity from Ofcom on what returns they’ll be allowed to earn from the next phase of fibre-to-the-home investment. And I guess that’s the pain bit of the price, that in the fibre-to-the-cabinet end of the street that went on after the financial crisis, you know, maybe their returns are a bit too rich. 

So, there’s action and reaction with regulators always. We thought, pre-COVID, at £2, that a lot of misery with all the debacle in Italy was priced in and that we were buying more shares. Hands up to thinking it was cheap at £2. But it goes back to the earlier generic question of what is the right valuation of BT? All things being equal, and however disrupted it’s been on the consumer side because of COVID-19, we still think it is well north of £2. There’s quite a lot to shoot for there.

AstraZeneca’s role in finding a vaccine for COVID-19 would clearly be beneficial for them in the medium term. How do you look at investments in pharmaceutical stocks at this stage of the pandemic? 

The irony is that we had big positions in the pharmaceutical stocks for many years. We held them in a situation where the market was very distrustful of promising pipelines of new drugs that never came to fruition and got the commercialisation that was hoped for. So, there was a lot of suspicion in those prices. So, in a UK stock market where we’re all being told that there’s not any growth stocks, maybe these pharmaceutical stocks could generate some innovation-led top line growth thanks to their vaccine work. That’s the A prize. But how does that translate into profits and, importantly, cashflows? Those are the key drivers really.

Our positions have nothing to do with vaccines or COVID-19, and we’re not holding our breath for some transformational product to come through. But if it does and we end up having to have a vaccine booster every year, like the flu jab, then in time they might be able to monetise that if their trials do prove successful.

Colombia Threadneedle is a fund manager  for St. James's Place.

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The opinions expressed are those of the fund managers listed above and are subject to market or economic changes. This material is not a recommendation, or intended to be relied upon as a forecast, research or advice. The views are not necessarily shared by other investment managers or by St. James’s Place Wealth Management.