Why my fund is overweight UK and underweight US shares

Bankers Trust manager Alex Crooke sits down with ii’s Lee Wild to discuss how he manages his global equity portfolio. He explains why the trust is overweight UK shares, an area he thinks offers attractive valuations because a lot of the bad news is already priced in.

Crooke also reveals why he is underweight US shares, and what he has been buying and selling recently.

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Lee Wild, head of equity strategy, interactive investor: Hello with me today I have Alex Crooke, portfolio manager at Bankers Ord (LSE:BNKR) Investment Trust. Good morning  Alex. 

Alex Crooke, portfolio manager at Bankers Investment Trust: Hello.

Lee Wild: In your portfolio, the trust is overweight in the UK. Why is this and are there any companies that stand out for you at the moment?

Alex Crooke: So, the UK. It’s a hard one to make a really strong growth story about but what lifts markets often is a lack of increasing bad news and I think the UK has weathered an awful lot, should we say, in terms of the effects and benefits, or lack of them, [of] Brexit, and the challenges [of] four prime ministers in the last few years. 

When you look at a market, I was always told by my previous boss that interesting opportunities and markets are often under-researched, under-owned and unloved. I think that sums up the UK stock market to some extent. It is unloved. But there is an election this year, so we should have five years of reasonable certainty [over] whoever is going to govern the country. I think we’re seeing the low point of growth and we should see recovery, as one hopes the Bank of England starts cutting rates. I think that’s a lack of bad news. Meanwhile, there’s some very cheap stocks in the stock market. I mentioned retail banks [and] Lloyds Banking Group (LSE:LLOY) looks to us a very attractive investment. But there’s a lot of stocks in the UK that are very well managed, with good growth characteristics, not the highest, but pretty low valuations. 

Lee Wild: You’re underweight the US. Which firms in the US do you really like at the moment?

Alex Crooke: Our largest holding, which is probably the one we like the most, is Microsoft Corp (NASDAQ:MSFT). It’s owned by a lot of global trusts one has to admit, and it’s got a very nice dynamic of a business, which has turned pricing from sort-of buying software on a one-off basis to having like an annuity business where you have subscriptions for [Microsoft] Office and other services. That subscription model has worked very well for them. They’ve invested very heavily, obviously, in the cloud services, which is going very strongly. But the real driver in the last year or two has been artificial intelligence (AI), big investments coming through there and we think a lot of productivity and revenue opportunities to come. So that’s the biggest.

JPMorgan Chase & Co (NYSE:JPM), again back to my point on retail banking, looking a very good industry. Outside that, I think less of the growth but more of the reliability of returns is healthcare, which is being pretty dull outside some of the manufacturers of obesity drugs. But it’s a really solid sector to be invested in [for] the long term. We own companies such as Medtronic (NYSE:MDT), which does a lot of heart valves and things to do with the heart. And Stryker Corp (NYSE:SYK), which does a lot of implants, and UnitedHealth Group Inc (NYSE:UNH), which manages hospitals. There’s quite a strong opportunity in there to find some good, stable businesses. 

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Lee Wild: Do you think US tech stocks are overvalued at the moment and therefore owning a global or US index is dangerous? 

Alex Crooke: Yes, I think my challenge with the indices is that they effectively just follow the largest companies in the world. That might not be where the best opportunities are, and it also doesn’t follow where the economy and GDP is manufactured around the world, or where that might be growing quickest. If you look at wealth in terms of GDP around the world, it’s about a third in America, a third in emerging markets, including China, and about a third of what would be Europe and Japan, the sort of other developed markets.

I tend to look at that as a model of where I want companies to invest their assets, [and ask myself] where I see opportunities for growth. Equally, where am I overpaying for it? I think one has to say there are some great growth companies in America, but should it be 70% of the global market, which it is in terms of listed companies? I’m not sure, that feels very high to me. There are some great tech companies. There have been price rises where valuations are looking high, but they need to keep justifying that growth. We’ll see where that comes through in the next year or two. 

Lee Wild: Do you move the portfolio around a lot and can you talk me through some of your recent portfolio changes? 

Alex Crooke: We tend to, on the whole, let the portfolios grow and expand with the returns they generate. Having said that, as an investment trust, we can use leverage, or gearing. We borrowed over long term. We’ve issued long-term notes to other investors and the cost of our debt is only about 2.7%, running out all the way to 2045. So, we’ve got that leverage to invest and pull back.

Obviously, if we pull it back into cash, it yields five. It’s higher than the cost of our debt, so it doesn’t hurt returns in that sense. [Over] the last few months, markets have risen very strongly. We’ve taken a bit of money off the table to reduce that leverage, and that’s really been the key asset change in the last few months.

As I say, we had a very strong end of 2023. [This year] started in a very strong sense. I think holding some dry powder is probably sensible at this point, so we’ve reduced principally Japan, which has done so well, but [we are] still very overweight there. And it’s taken a little bit of money out of Europe as well. 

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Lee Wild: Are you able to tell us any of the companies that you’ve reduced your interest in?

Alex Crooke: We’ve tried not to sell whole companies. When you’re reducing your leverage, it’s easy just to sell a little bit of everything. It’s very economic and low cost to do that. Most of the positions we’re quite happy where we’ve been settled really. Turnover has reduced in the last six to 12 months. We’re still in this strange point where, [people are thinking] will rates get cut? How quickly might they get cut? Would that push you into more cyclical companies which benefits as economies pick up, or will that not have much effect on the economy? I think it’s quite challenging at the moment with that sort of macro view. 

Lee Wild: And Alex, the final question and one that we ask everybody: do you invest in your fund?

Alex Crooke: I’ve been adding to my holdings every year since I started managing this in 2003, and I’ve never sold a share. So, yes, it’s a very substantial part of my investments. 

Lee Wild: Alex Crooke, portfolio manager at Bankers Investment Trust. Thanks very much for joining me today. 

Alex Crooke: Thank you.