From an investor’s perspective, optimism has returned with UK equity income funds back as the nation’s favourite, according to the IMA.
Meanwhile a healthy allocation to domestically-positioned stocks is no longer frowned upon as it was a year or two back when most managers tilted their portfolios towards overseas earners.true
For example, Tim Steer of Artemis UK Growth has been among those backing the likes of ITV and William Hill, while shares in another perennial fund manager favourite, Halfords Group, raced off this week after it reported a surge in bicycle sales.
As James Lowen of JO Hambro Capital Management’s UK Equity Income Fund, says, domestic UK is no longer a “hidden secret”.
He explains: “The IMF was late to the party because many of these assets were re-rated as investors were starting to become more interested in them,” adding that he and co-manager Clive Beagles have re-oriented the fund’s domesticity weighting down the valuation chain.
Natural contrarians
Whereas, say, a stock like ITV doubled last year, these managers’ natural contrarian stance has led them more towards food retail, particularly Sainsbury’s and Tesco, which is at a 20-year valuation low at a P/E of 10x.
Adds Lowen: “If the UK economy recovers, these supermarkets will see like-for-like positive sales and that will breathe life back into the sector – profits, sales, gross margin – and give the management more flexibility.”
Certainly, these days UK managers seem more willing to explore further down the cap scale, outside of the FTSE 100.
For example, Mark Barnett of Invesco Perpetual’s UK Strategic Income Fund, is finding a lot of resilient dividend-paying companies in the mid-cap space, including Provident Financial, N Brown Group, Hiscox, Talk Talk and Ladbrokes. Again, these are names with substantial business interests in their home market.
Huggers beware
UK fund managers are often accused of sticking close to their benchmark, particularly in the equity income space. There’s the oft quoted stat that the top five dividend payers – Vodafone, Royal Dutch Shell, HSBC, BP and Glaxo – account for almost 40% of total FTSE dividends.
However, beyond large-cap defensives, it seems there is still an abundance of opportunities in the domestic market which still offer strong balance sheets and dividend growth… so long as you can pick them up at the right valuations of course.
What will new Bank of England governor Mark Carney have to add to the equation? Schroder’s economist says welcome to "Zombie Britain" here.
