Gam UK Equity Income manager Adrian Gosden is looking to tap into insurance firms like Beazley and financials in his hunt for inflation-beating dividend growers.
Speaking at a webinar presentation last week Gosden signalled there is “more change to come in the portfolio”. Having taken advantage of last year’s Covid crash to move into cyclical areas such as construction, chemicals and industrials, he wants to put more capital to work to chase “a new wave of investments that are coming onto the radar”.
Among the new opportunities Gosden has spotted is FTSE 250 firm Beazley, which is the first insurance holding he has added to the portfolio in some time. He owns Legal & General in his £177m fund but sold out of Hastings Insurance when it was taken private last August.
Gosden said that insurance has “been a part of the market we haven’t really had any interest in because we couldn’t see the value”. However, Beazley caught his eye “because of concerns about pandemic payments and also cyber attacks which are the type of things they will insure”.
Beazley’s market cap is £1.8bn and Gosden believes that “in the next few years, assuming there aren’t too many losses, it could be generating good cash and good dividends”.
Shift toward large-cap companies
Over the last few months Gosden has been finding more opportunities in large-cap companies. Gam UK Equity Income currently has 55% invested in larger companies versus 45% in small and mid-cap firms. “The direction of travel is maybe less smaller, maybe more big,” he said.
In the large-cap space Gosden has been especially drawn toward financials which he thinks are better placed to deliver consistent dividend growth amid the threat of rising inflation. Lloyds is the largest holding in the fund at 4.7%.
“Financials will cause the biggest delta because they provisioned for the pandemic and it turned out that the hit of the pandemic was nothing like the provisioning so that provisioning is all coming off and with that comes the ability to pay dividends,” Gosden said.
“The regulator is slowly, but surely, making the same observation and allowing them to distribute that cash so you’ll see the dividends come through and that will be the biggest one into the pockets of investors to note.”
He added: “If you think there might be some inflation or some increases in prices and wages, you must ensure your portfolio has a good exposure to financial shares. They benefit the most from those movements. That is to say your banks will earn more money with the interest rate moving and that will enable them to report better earnings and pay better dividends.”
See also: UK investors turn bullish on ‘big four’ banks after bumper earnings
UK corporate activity will be higher in 2021
Gosden pointed out many of Gam UK Equity Income’s existing holdings are already on high yields and are expected to see further dividend growth this year.
As at the end of April top 10 holdings Imperial Brands and British American Tobacco were yielding 8.7% and 7.7% respectively. Other major holdings like Vodafone, as well as National Grid and SSE, which are all yielding above 5%, are expected to grow their dividends in tandem with the Consumer Price Index and Retail Price Index, Gosden noted.
The resurgent dividend picture is a good sign the UK economy is back on track, Gosden said, as is the recent surge in corporate activity,”suggesting we’re not the only lunatic in the asylum”.
Corporate activity flourished last year as London saw 45 deals worth $47bn, including names such as RSA, G4S and TalkTalk, and Gosden expects this to be higher in 2021. Many of his own holdings have seen renewed interest from private equity investors, including William Hill and Scapa.
Gam UK Equity Income has returned 10.9% over three years, compared to the IA UK Equity Income sector average of 5.6%.
See also: UK equity managers see thriving corporate activity as biggest domestic market driver
