Watts commented that the share price gyrations seen on June 24th, the day after the EU referendum result was announced, ‘were more extreme for the house builders, the challengers banks and some of the retailers, than had happened during the financial crisis.’
He noted that the share prices of many of the more unloved sectors have since snapped back, but added, ‘the “Brexit basket” of sectors within the UK mid and small cap market remain around 15 per cent cheaper than those stocks perceived as being safe from Brexit volatility.’
Watts asserted that housebuilders, real estate companies, retailers and leisure are the sectors made bargains by Brexit.
He added, ‘we invested at the IPO stage in Bohoo.com, a retailer. At the IPO stage, the day before the referendum result, the shares were up from the IPO level, but then fell down to £1.37, at that level we felt it was pricing a recession in the UK, we bought more and now the shares ate £1.80.’
Watts saw similar value in the housebuilders. Of Taylor Wimpey he commented, ‘The shares fell to £1.15p, so we looked at it, and did our work, we looked at what would happen if the economy fell 10 per cent, if house prices fell 10 per cent, and even in that scenario, the company would be able to pay a dividend of 14p, so you were certainly been paid to take a risk, and if the recession didn’t happen, then there was a lot of value. The shares have gone up since then, but it was notable that the house builders trading statements since the EU referendum, they said that they noticed a little bit of softening in the market for the first couple of days, and then things got back to normal, people just got on with life.’
The fund manager added that a similar scenario has played out with the challenger banks, including Shawbrook, of which he commented, ‘the shares dropped to £1.30, we had been buying at £2.90, so it means we lost 60 per cent of our money in a day, and we don’t like that. I don’t think it had ever happened to us before. But we thought at £1.30 the market was pricing for a recession, and so we bought more, we thought it was a no brainer to be honest and the shares have done better since.’
Watts had invested in tonic company Fevertree at IPO, and has seen the shares soar from £1.24 and are now over £15, but Watts remains a shareholder.
The Old Mutual UK Mid Cap fund has returned 157 per cent over the past five years, compared to 62 per cent for the average fund in the IA UK All Companies sector in the same time period. That ranks the fund as the second best performer out of 236 funds in the sector in that time period.