Head off UK uncertainty with Man GLG Undervalued Assets

A lack of investor appetite for these unknowns has seen the UK equity market lag other major global indices in recent years. But depressed valuations, the prospect of an eventual Brexit resolution and broader currency considerations mean diversified UK equity exposure should still be a major part of the average sterling-based portfolio.

Investors looking to maintain or increase this exposure would do well to back a reliable fund with a strong track record and a diversified approach. One fund that fits the profile while following a different strategy to many of its peers is Man GLG Undervalued Assets (GB00BFH3NC99).

Henry Dixon and Jack Barrat, who run the fund, use a screening process to identify potential holdings. They then carry out more intensive research of these names, looking closely at a company’s assets and liabilities to assess the value of the business. The team seeks companies that “are considered to be undervalued relative to their asset base and to the returns on capital the companies are generating”. Target prices are established for potential holdings, with return forecasts having to exceed 20 per cent for FTSE 100 stocks, 30 per cent for FTSE 250 stocks and 50 per cent for small companies.

A focus on undervalued companies means the fund can be positioned very differently to its underlying market and other UK equity managers, but this has tended to pay off. Man GLG Undervalued Assets is ahead of both its benchmark, the FTSE All-Share, and the average Investment Association UK All Companies fund over three and five years to the end of October 2019.

Perhaps more importantly, the fund not only adds a level of diversification versus some other UK holdings, but has a balanced exposure to the market. The fund, which had 62 holdings at the end of September, had a 27.7 per cent weighting to small-caps, nearly 20 percentage points higher than that of its benchmark. It also has some micro-cap and mid-cap exposure, but half of the fund’s assets are in mega-cap and large-cap companies. This broad mix means that while the fund backs plenty of smaller businesses with higher growth potential, it should be diversified against a big move in either the value of sterling or sentiment towards a particular part of the UK market.

Similarly, while the fund’s search for undervalued equities does give it a tilt towards the value investment style, something that has struggled for many years, a focus on company cash flows means quality stocks are also included.

The consistency of the fund management process and a differentiated approach should stand it in good stead in the longer term. However, investors should be aware that the fund can perform very differently to both the index and other funds in this space. Man GLG Undervalued Assets has struggled against these in the shorter term, trailing both the FTSE All-Share and the IA UK All Companies sector average return over six months and a year to the end of September.

Investors looking to mitigate this risk may wish to hold Man GLG Undervalued Assets alongside a UK tracker or an active fund that invests more closely in line with the market. But this fund remains a good, flexible way to access the UK market for investors stuck in uncertain times. Buy. DB