The overseas shares top UK fund managers own and why

Unbeknown to many investors, UK stock pickers often have licence to buy overseas shares. These are the foreign stocks the interactive investor Super 60 funds are buying. 

Investors that buy big British companies can be short on options if they want to create diverse portfolios, due to the limited size of the UK stock market.

For example, Britain has no mega-cap technology stocks and only a couple of giant oil companies (Shell and BP) and pharmaceutical companies (AstraZeneca and GlaxoSmithKline).

Standing out from the crowd becomes harder when fund managers are drawn to similar stocks, particularly when they have a mandate to deliver higher than average growth or income.

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This means that leading funds often allow portfolio managers to own foreign companies in order to increase returns and reduce risk for investors.

Owning overseas shares can also help insulate fund managers against drops in the value of the pound, as shares priced in US dollars or euros become worth more when sterling weakens.

This has boosted funds that own overseas shares this year, particularly those priced in US dollar. However, a weaker pound buys fewer overseas shares when new purchases are made.

These are the foreign stocks owned by four UK funds featured in interactive investor's Super 60 list of rated funds.

Mondelez and Heineken

Veteran UK investor Nick Train owns American Cadbury-owner Mondelez and Dutch brewer Heineken in both his UK funds: Finsbury Growth & Income trust and Lindsell Train UK Equity fund. He can invest up to 10% of open-ended fund in foreign shares and 20% of the trust.

Both companies fit with his investment philosophy of owning powerful brands, with loyal customers and plenty of growth still ahead of them. They both form part of his 40% allocation to “consumer defensive” stocks, according to data firm Morningstar.

His other big consumer staples positions are in Diageo and Unilever. Consumer staples have struggled somewhat this year due to higher input costs, and an increased investor focus on valuation in the face of rising interest rates.

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Heineken shares have fallen 13% year-to-date and Mondelez’s are down 17%. The FTSE All Share Index, which Train is measured against, has fallen 12%.

But Train continues to back the sector. In May this year he acknowledged that performance of such shares had been “pedestrian”, especially when compared to American tech stocks, but pushed back and argued that they are defensive and a good inflation hedge, and also have good growth prospects.

Train said: “Neither the ‘defensiveness’ of the sector in a tech shakeout, or the inflation protection are enough, to our minds, to justify our continued holdings in these companies. In addition, we must believe the sceptics are wrong and that the brands are in fact not mature and can continue to deliver real (above inflation), secular growth through the rest of this decade and further.”

He notes that Heineken has been able to increase prices, and revenues for its premium brands such as Moretti, Tiger and Desperados, were up 25% in the first three months of 2022. Premium makes up 40% of Heineken’s business and Train expects this segment to grow steadily for the rest of the century.

Mondelez grew revenue 8% in the first quarter of the year, with half of this due to price increases and half due to revenue increases.

Meta and Baidu

Social media firm Meta (formerly Facebook) and Chinese search engine Baidu are owned by Hugh Sergeant in Super 60-rated R&M UK Recovery. They do not appear in the top 10 positions, however.

He says owning foreign shares helps the fund beat its benchmark by providing access to attractive industries and companies which may be less prevalent in the UK market.

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Owning foreign shares also lowers the risk profile by diversifying away from one specific geography with a unique set of macro and socio-economic influences, which may at any one time create a challenging investment environment, he adds.

On Baidu, Sergeant said: “The shares have been under pressure due to Baidu’s maturing core advertising revenue which has undoubtedly been negatively impacted by China lockdowns and broader macro headwinds.

“But return to moderate growth in the core operations (driven by improving macro conditions) and alignment to long term structural growth trends of cloud computing and autonomous cars presents a compelling investment case for a company we believe trades at a material discount to the sum of its parts.”

On Meta, Sergeant says that there is still a long-term growth story for the company and shares are cheap, trading at a price-to-earnings ratio of 13 times, which means the bad news could already be priced in.

Bayer and H&R Block

Jupiter can invest up to 20% of its Jupiter UK Special Situations fund in overseas shares.

As value investors, it looks to buy cheap shares, and applies the same criteria to foreign stocks as it does to UK stocks. It first started investing in overseas names in 2011 in the UK Special Situations Fund.

The fund group said: “We invested in a US- listed company Hewlett Packard following its acquisition of UK based company Autonomy. Following the incredibly disappointing acquisition the share price fell significantly, which is when we took an initial position in HP.”

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The allocation to overseas names gives the portfolios greater diversification as Jupiter fund managers only look to take on new names where they can’t find the same businesses and exposures in the UK. 

Jupiter UK Special Situations currently holds H&R Block, an American tax preparation company, as well as German pharmaceutical firm Bayer.

It said: “H&R Block shares were lowly valued as the market thought that an online competitor, Turbo Tax, would take market share. However, as IRS tax filing in the US is very complicated and leads to significant refunds, people don’t want to make a mistake. Therefore customers seek experts who can provide assistance.  H&R Block provide this assistance in stores and also online.

“Bayer shares have been lowly valued due to concerns over litigation, as an ingredient in their weed killer was found to be carcinogenic. This issue has been known by the market for a number of years but potential future claims have caused fears over future growth from the market."

Merck, J&J, Novartis, Sanofi, TotalEnergies and Woodside Energy

City of London investment trust has 17% invested in overseas shares, including pharmaceutical companies Novartis, J&J, Merck and Sanofi, as well as energy firms TotalEnergies (France) and Woodside Energy (Australia). Up to 20% of the portfolio can be invested in overseas shares.

Manager Job Curtis says that this is to help diversify the portfolio, but also give access to companies that do not have peers in listed London, as well as to continue owning companies that have delisted from the UK market.

He said: “In oils, rather than just having BP and Shell, we have some Woodside Energy, which is an Australian-listed oil company and we also have TotalEnergies, which is French-listed. So, I think gives a bit of extra diversification rather than just having everything riding on kind of a couple of UK-listed stocks."

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Curtis adds that another advantage is buying companies that do not have equivalents in the UK market.

He said: “Just under 10 years ago, City of London invested in Microsoft, which has been a highly successful investment, it was on a 3% dividend yield and very out of favour and it's really gone up many times since and I've taken some profits, but obviously there's no equivalent to Microsoft in the UK market. I think that's another example of where one can benefit from the overseas.”

Curtis also owns BHP, the miner that fully listed shares in Australia this year. He said: “This year BHP Group, the miner, basically made its complete listing in Australia rather it was 50/50 Australia/UK before.

“It's been a great dividend payer in recent years. So, we've hung on to our BHP. And as another example, Ferguson this year, which was UK-listed is moving its listing to America where its whole business is,” he said.