“If we look at Lloyds for example, they are very heavily overweight the government UK mortgage market and bad debts are at all-time lows,” he said. “It warrants concern that this could be as good as it gets, and with interest rates about to turn life could get a bit tougher.
“Another worry is that there is far too much money being moved onto Lloyds’ book at the moment. They are financing themselves on basically next to nothing, but at the moment the variable mortgage rate is 4%-plus. A lot of the people that are paying that rate cannot go anywhere else, so they are either in negative equity or they are borrowing too much money, and it makes me think that the regulators are going to catch up with the bank at some point.”
With that in mind, it seems strange that a manager with such a steadfastly negative view on banks in general would have one – HSBC – in his top 10 holdings, which, while around 2% underweight to benchmark, still accounts for 3.47% of the portfolio.
“The reason I have HSBC is based around the core yield approach of the UK Equity Income Fund,” Morton explained.
“HSBC has a very attractive dividend yield at the moment and looks very safe. Even though it is not growing very much, it still has a tier one capital ratio of 11-12% and gives us a global play. It is not one of my best ideas, but the yield is attractive, solid and safe.”
