David Jane, who jointly runs about £900m across a range of four multi-asset funds at Miton, has been increasing his exposure to UK shares to a higher level than it has been for "many years".
Mr Jane’s funds are all global mandates, and can invest in both bonds and equities.
He said: "As a general rule right now, I am trying to buy companies that have low levels of debt, if we are going to have a major sell-off, then companies with low levels of debt will do OK, so they are quite defensive, but if there isn’t a sell-off they will do quite well in any case, and if you want to buy defensives, then the UK defensive shares are the cheapest in the world, they are screamingly cheap."
He added that with the UK economy doing well he has invested in companies such as banks and house builders that are exposed to the economy.
Mr Jane said: "The UK economy is the fastest growing in Europe, and yet the stock market is the cheapest on the fundamentals, but is spectacularly unloved right now."
He pointed to the spread, or gap, between the yield on the UK ten-year government bond, which is presently 1.2 per cent, and the yield on the shares of the FTSE 100 which is more than 4 per cent.
Such a gap would be expected to occur when investors expect a severe downturn in the economy, with inflation and interest rates to fall.
In that scenario they invest in UK government bonds as a safe haven but sell off shares, which causes the yield on equities to rise.
Mr Jane noted that such market conditions are more typical when an economy is slowing rather than growing, as is currently the case in the UK.
This is his rationale for believing UK shares are cheap.
Mr Jane’s increased exposure to the UK mirrors that of other investors, with Schroders manager Sue Noffke recently doubling the level of debt in her investment trust to buy shares exposed to the UK economy.
The multi-manager team at BMO also revealed they have been "aggressively" buying UK funds that are exposed to the UK economy.
David Zahn, head of European Fixed Income at Franklin Templeton, said the differential between the bond and equity yields was caused by investors in the UK wanting to buy a safe haven asset at a time of market uncertainty, while at the same time overseas investors continued to shun UK shares. This is creating a wider than typical gap between the bond yield and the equity market yield.
The latest data for the UK economy showed inflation was 1.9 per cent in March, which is below the Bank of England’s target of 2 per cent.
This means the gilt yield, at 1.2 per cent, is paying a lower rate of interest than the rate of inflation, so investors who own those assets are losing money, in income terms, every year.
