UK fund managers name their favourite international shares

The UK stock exchange is one of the oldest in the world but occasionally, it shows its age. While it plays host to a range of international companies, a broad spectrum of sectors, and can tap into many of the hottest global themes, it lacks choice in key areas, and particularly in the “new” economy. 

The UK market’s weakness over the past three years has also contributed to a lack of renewal. The IPO market has been anaemic, meaning relatively few new companies have come to market. The hot money has gone elsewhere, mostly to America, where companies can command higher valuations. It has left the UK stock market looking top heavy in areas such as commodities and banks.

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The solution for many UK managers has been to use their ability to invest up to 20% of their portfolios in international shares to best effect, picking up selective holdings to balance the UK’s sector biases and lack of higher-growth areas. While the natural assumption would be that UK managers would use this allocation to top up on technology – the most glaring sector hole in the UK market – the reality is more nuanced and will depend on the style of the manager.

Tapping into areas the UK market lacks exposure to

Certainly, there are UK fund managers who look to international markets to gain access to growth markets poorly represented in the UK. For example, Emily Barnard, deputy portfolio manager on the Edinburgh Investment Ord (LSE:EDIN)Trust, says their philosophy is focused on identifying growing companies with strong economic moats.

Barnard says: “We use the overseas element of the portfolio to gain access to businesses with the kind of characteristics or features that we seek but which are not available in the UK market.

“The principal overseas holding in the trust is Verisk Analytics Inc (NASDAQ:VRSK). Verisk is a US-listed strategic data analytics and technology partner to the global insurance industry. Through advanced data analytics, software, and industry knowledge, it aims to help clients improve their operating efficiency and underwriting and claims outcomes, combat fraud and make informed decisions about global risks.”

This search for diversifying sources of growth is the also the motivation for Charles Luke, senior investment director at abrdn. The Murray Income Trust Ord (LSE:MUT) he runs has 16%-17% allocation to international stocks. He says: “The main reason for holdings companies not listed in the UK is to gain access to interesting industries with attractive long-term growth prospects that aren’t available, or for which there are few options, for UK-only investors.

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“We own companies such as Air Liquide SA (EURONEXT:AI) (industrial gases); Kone (elevators); L'Oreal SA (EURONEXT:OR) (cosmetics); Microsoft Corp (NASDAQ:MSFT) (technology/AI); Lvmh Moet Hennessy Louis Vuitton SE (EURONEXT:MC) (luxury goods); Novo Nordisk A/S ADR (NYSE:NVO) (weight loss); and Accton Technology (network/data equipment). These high-quality companies help to provide diversification and add exposure to salient long-term trends.”

Diversification benefits of going overseas

For value managers, the considerations are different. International holdings may bring investments in cheap shares around the world. Ian Lance, co-head of the Redwheel Value and Income team, says: “There are usually two reasons we hold international stocks in our UK portfolios. The first is to access a cheap sector that is not listed in the UK such as autos. For instance, we own the car company Stellantis NV (EURONEXT:STLAP).”

He will also own international stocks to create a better sector balance in the portfolio. “Rather than have 16% in the energy sector through two 8% holdings in BP and Shell, it makes more sense to have smaller holdings in these and then also own an international company, in our case TotalEnergies SE (EURONEXT:TTE), given that these are very similar global businesses.”

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Alternatively, the move to invest in international shares may come in response to specific circumstances. For Simon Gergel, portfolio manager at Merchants Trust Ord (LSE:MRCH), the move to invest beyond the UK is a relatively new one. The trust started to invest selectively in European shares during the pandemic, when UK companies cut their dividends significantly, leaving less choice for income-focused managers.

Gergel says there are two types of overseas investments that he considers for Merchants. First – in common with the other UK managers – it would be those that give exposure to a sector or industry that is poorly represented in the UK, to add diversification and potentially additional performance from a different source. “One example of this was the car company Bayerische Motoren Werke AG (XETRA:BMW), which we were able to buy at an attractive level and make a good profit, by taking advantage of the detailed knowledge of our German colleagues. There are no equivalent large car manufacturers listed in the UK stock market.”

Gergel explains the second type of situation is where overseas companies provide an alternative to UK-listed companies in the same sector. He notes: “For example, the UK pharmaceutical sector is highly concentrated in two main companies, GSK and AstraZeneca. While we have favoured the sector for some time, we have only had a positive investment view on GSK (LSE:GSK) in the UK. By adding Sanofi SA (EURONEXT:SAN), we were able to increase the exposure to the sector without having too much exposure to a single company.” 

For Julian Cane, portfolio manager of the CT UK Capital and Income Ord (LSE:CTUK) investment trust, the flexibility to invest overseas allows them to stay invested in favoured holdings even as they move from market to market. In an era of cross-border takeovers and mergers, and international business dealings, this is increasingly common.

For example, it has enabled Cane to remain invested in building materials group CRH (NYSE:CRH). He adds: “We originally invested in CRH when it was an Irish company, listed on the Dublin Stock Exchange. We continued to invest in CRH when it moved its listing to London and then when its main listing moved again to New York. The move in CRH’s listing follows the development of the business as it has diversified and become more international over the years.”

The trust is also a long-standing investor in Ferguson Enterprises Inc (NYSE:FERG), a business that started life as Wolseley in the UK. “The US operations it acquired of Ferguson proved to be much more successful, so after disposing of the remaining UK Wolseley operations, it has moved its main listing to the US,” he says.

What to bear in mind with overseas stocks

There are complexities to raising international holdings. For example, does the team have the expertise to research international shares? This is easier for the large asset managers such as Allianz or abrdn, which will have analysts and fund managers researching and investing across Europe and elsewhere. Gergel says he has significant expertise across Allianz that he can tap into, allowing him to “cherry-pick” the best ideas.

Gergel also highlights a second problem for UK investors: “When investing internationally, it is important to understand withholding taxes, which can reduce the income that UK investors received from overseas dividends. Currency fluctuations can also be important, although it is worth remembering that the economic exposure of most large UK-listed companies is predominantly international rather than domestic.”

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A final consideration is that many of the historic problems with the UK market are starting to resolve, including the IPO market potentially reviving.

Equally, the UK government has belatedly realised the importance of capital markets to the functioning of the economy and is taking steps to revive interest in it. While it is currently under review, this is likely to involve harnessing pension fund capital to support the UK’s growing businesses.

The UK appears to be putting a tough decade behind it, with greater political stability, strong economic growth and growing innovation. This may ultimately bring a renewal for the UK market and greater choice for investors. In the meantime, being able to invest selectively in internationally listed shares can bring balance, growth, and income to a portfolio.