And, in Mark Wharrier, it seems as though the firm has someone that shares its vision.
“I spent the first 10 years of my career running defined-benefit pension funds, and in the past five years those markets have completely matured,” he says. “A lot of that money is slowly being recycled into retail products just like this one because investors are looking to find a good running yield and some inflation protection.
“I am really bullish about these sorts of funds because I think they are solving a lot of problems for the generation of pensioners that are coming through that have lots of assets and now need an income.”
While the fund is currently on the smaller side of the equity income space, Wharrier says the team has deliberately focused on the FTSE 350, which means the portfolio could be a multiple of its size and still have the ability to generate performance. And, he adds, having the backing of a behemoth like BlackRock means it can punch above its weight in terms of access to companies and dive deep into market analysis.
There are also advantages to having three co-managers running the fund, not least of which is the time this affords each of them to kick the tyres of the investments they are considering. “If you want to spend two weeks visiting tier-two and three cities in China, you can because there are still two managers in the office running the fund,” he says.
Pressure testing
Indeed, Wharrier has just got back from two weeks in south-east Asia visiting Unilever’s operations, and what he has seen has clearly made him bullish on its prospects.
“You realise there are decades of growth in Unilever in terms of the markets it is focusing on. There are 100 million people in the Philippines, the median age is 23 and Unilever has a 30-40% market share in all the categories to which it is exposed.”
There are other reasons why Wharrier likes the consumer giant: it has a dynamic product mix and a strong franchise, characteristics Wharrier says are liable to be increasingly important in future, as they provide it with pricing power.
“I worry about companies that don’t have pricing power in the current environment. The ability to grow profits is really about one’s ability to raise prices.
“This is a low-growth world. If you can’t move up prices, how are you going to deal with the living wage and the structural cost pressures bubbling away under the surface?”
He cites the falling oil price as having masked a lot of these underlying pressures. Another area of concern is leverage, especially in some of the harder bond proxies.
“We are now in the eighth year of super-low interest rates. I would be concerned about companies that are reliant for their survival on that continuing The other side of that coin, however, are those companies that stand to benefit from an increase in rates, Wharrier says, which is one of the reasons he likes the banking sector, but he is wary of trying to make too many large macro calls.
“Over the next few years, the range of economic outcomes is quite wide so it is dangerous to have a portfolio dominated by one macro bet. We have been trying to flatten the macro risk and focus instead at stock level, which is easier said than done.”
In order to do that, he explains, the team has been focusing a significant amount of energy on companies where self-help is driving the investment case.
This is the second major reason he likes the banking sector. Not only is it cheap, he says, but dividends in the case of Lloyds are rising and if the environment does change, they will be able to make money again on their deposit base, which is something the market is currently not pricing in.
Wharrier says: “We like companies that have been through a crisis, that are now quite clean from a balance sheet perspective and are focusing again on shareholders. “If you look at other big sectors of the market – oils, resources telecoms, pharma – we keep asking ourselves, are the dividends sustainable, can the cashflow grow?
“The banking sector, on the other hand, is a little different, both in terms of the starting point valuation and also the focus on shareholders. These companies are not trying to diversify or waste money, they are very focused on trying to rebuild their reputations, which is a dynamic we like.”
An open mind
Wharrier also likes tobacco, as he feels it is the one consumer staple sector that has pricing power.”
This, however, is one of the few ‘traditional’ income areas that is attractive right now as he is nervous of the hard bond proxies. “These hard proxies have been a good source of alpha in the past few years. I would rather focus on the areas that will benefit if there is a change at a macro level,” he says.
