TM Sanditon UK - is the UK entering a slowdown?

Kate Marshall | Thu 27 July 2017

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• Julie Dean believes the UK is coming to the end of the current business cycle
• Fund is positioned accordingly and focused on lowly-valued areas of the market
• Performance has disappointed since launch; we continue to believe in the potential for good long-term returns

Our view

Julie Dean adopts a unique investment approach, in our view. The manager aims to position the TM Sanditon UK Fund according to her interpretation of where we are in the business cycle. She typically invests in more economically-sensitive companies ahead of periods of anticipated economic expansion, and adds to defensive areas during slowdowns.

The approach often relies on Julie Dean identifying trends ahead of her peers and investing in companies poised to benefit. She can be too early in making these calls at times and, since this fund’s launch in June 2015, her views have not always come to fruition. Over this time the fund has made a positive return, but it has underperformed the FTSE All Share Index. Please remember past performance is not a guide to future returns.

Past performance is not a guide to future returns. Source: Lipper IM to 30/06/2017. Full year past performance prior to 2015 is unavailable.

We have been disappointed with the fund’s performance so far. We will therefore continue to monitor the fund closely and inform investors if our views change. That said, we feel Julie Dean has the potential to deliver good long-term returns for investors. She is an experienced investor and has managed portfolios of UK shares for almost two decades. She is also part of a close-knit team working in a smaller, boutique investment house, which we feel is conducive to the manager’s investment approach. The manager also invests in medium-sized and smaller companies, which we feel provides opportunity to add value. Please note smaller companies are higher risk.

Julie Dean is currently more cautious than some other managers in this sector and we feel the fund offers something different to many of its peers. It could therefore be used to diversify a wider UK portfolio. The fund currently features on the Wealth 150+ list of our favourite funds across the major sectors.

Is the UK approaching the end of the business cycle?

Julie Dean believes we are approaching the end of the expansionary phase of the current business cycle. The next phase is a slowdown. Inflation is rising, which could eventually lead to rising interest rates; productivity is falling; and wage growth is also stagnating. In the manager’s view, these are signs that the economy is gradually slowing down.

In this stage of the cycle the manager tends to favour what she calls ‘growth defensives’. These companies typically demonstrate earnings stability and low levels of volatility. They have proven popular with investors in recent years and as many have performed well, their share prices have started to look overvalued. Julie Dean has therefore maintained less exposure to this type of company than the broader UK market.

This proved beneficial to performance in the latter half of 2016 when investors favoured more undervalued and economically-sensitive areas of the market. However, some of the more defensive sectors have performed well again in 2017. The fund has missed out on some of the gains made and underperformed the UK stock market so far this year.

Julie Dean has instead focused on out-of-favour and lowly-valued companies, which she feels are less likely to suffer share price falls in a downturn. She has focused her attention on ‘value defensives’, which she suggests also demonstrate earnings stability and low levels of volatility, but growth is generally at a slower pace. Supermarket Sainsbury’s and engineering group Babcock currently fall in this category and are held in the portfolio.

The manager has also invested in some companies that rely on consumer spending for their revenues. Julie Dean is mindful some of the more highly-valued companies could be vulnerable if consumer spending weakens in an economic slowdown. She has therefore invested in those that remain attractively-valued and have good growth potential, although she is unlikely to increase exposure significantly from here.

The manager believes Dixons Carphone, for example, has been unfairly dismissed by investors against a weaker backdrop for the UK consumer. However, she feels demand for mobile phones is unlikely to decline as they are an essential part of many people’s everyday lives. She is also encouraged by the company’s attractive dividend yield, earnings growth, and the fact it continues to take market share from competitors.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.