Traditional defensive stocks Vodafone and GlaxoSmithKline have maintained their positions in the top five-ranked UK companies by market cap, while British American Tobacco, Diageo and AstraZeneca have made their way into the top 10.
These defensive names have replaced miners Anglo American and Rio Tinto and financials Barclays and Royal Bank of Scotland as some of the biggest names in the UK.
Michael Clark, portfolio manager of Fidelity MoneyBuilder Dividend and Fidelity Enhanced Income Funds, who pulled together the data from Datastream, said: “Given their relative outperformance investors may start to question if defensive stocks are over-priced. Although many defensive stocks have re-rated relative to the market, compared to their own history I do not think this is the case.
“Pharmaceutical stocks, for example, still offer excellent value in my opinion. GlaxoSmithKline and AstraZeneca in particular are favourites. Glaxo’s share price is the same level as 15 years ago, yet earnings have doubled over that time.”
Yet not everybody thinks defensive dividend-paying stocks still look attractive. Both David Coombs, head of multi-manager investments at Rathbones, and Marcus Brookes, head of multi-manager at Cazenove have sold funds run by defensive stocks and income guru, Neil Woodford, recently.
Woodford wipeout
Last week Brookes, who runs a range of multi-manager funds at Cazenove, said he no longer held any exposure to Neil Woodford. He explained that in the past 18 months tobacco stocks, which Woodford is a well-known fan of (three of his top ten holdings in the Invesco Perpetual Income and two of the top ten in the Invesco Perpetual Higher Income funds are tobacco companies) have outperformed by 40% while mining stocks have underperformed by 40%.
“We are back in the zone where cyclicals are worth buying and we only get to this point when the world looks pretty shitty. There are times in an economic cycle when value is completely out of favour and so we won’t own managers like Woodford. Safety was key in 2011, but today it is completely overpriced,” Brookes added.
He has replaced holdings of Woodford’s fund with growth managers such as Sanjeev Shah on Fidelity Special Situations and Chris Rice, Cazenove’s European equity manager.
Meanwhile, in his lower-risk portfolios David Coombs has sold holdings in Woodford’s Edinburgh Investment Trust to take some profits from what described as over-priced blue chips. He is holding it in cash until he sees some more convincing economic data to warrant an equity rally.
It’s worth pointing out that Woodford’s Edinburgh trust was up 22.8% in the past year, compared to 19.2% from the sector average, but Coombs and Brookes are sceptical about the likelihood of his defensive dividend darlings continuing to outperform the rest of the market for the remainder of the year.
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