But, it is not just a stock’s ability to weather the forthcoming political storm that managers are after. With the prospects for growth globally still fairly benign, despite yesterday’s UK GDP numbers, the ability to grow one’s dividend is increasingly prized.
As Mark Barnett explains it, for example, in his latest commentary outlining the changes made to the Invesco Income Funds in the 12 months since taking over from Neil Woodford: “My focus is to find companies that can be resilient across many different macro-economic outcomes. Resilient in as much as while the shares may fall out of favour with the stock market for a period, the company itself has the management team and business model in place to enable it to deliver consistent profit growth and a rising dividend, regardless of global currency fluctuation, commodity price and interest rate moves.”
While he says trying to second guess the result of the election is largely a futile exercise, Barnett does believe that dividend growth in 2015 will need to be justified by underlying earnings growth because “the pay-out ratio cannot keep rising sustainably from current levels”.
“Equally,” he adds, and despite the fact that the FTSE 100 has fallen back some 200 points from its record breaking 7,000 level, “we cannot rely on a significant re-rating of the market as valuations are already on the expensive side of fair value in my view.”
Margaret Lawson, manager of the SVM UK Growth Fund agrees that the focus needs to be on resilience, adding that, markets continually climb a wall of worry which there is little one can really do about.
“At the end of the day the only thing you can do is to pick out the best in class stocks; the ones with sustainable returns, sustainable cashflows.”
The best year for stocks since the downturn
She too is of the opinion that while the market is not overvalued it is not cheap. But, she says, “Markets were taken by surprise by the quantum of the recovery in 2014 in the UK, which was very much aided by the collapse in the oil price.”
She explains that, despite this, however, for much of 2014, people were focused on when the rate cycle would change and so were moved into more defensive areas, rather than looking at the level of aggregate demand.”
This has changed in the last six months and Lawson expects the general upwards trend to continue on the back of low inflation, lower-for-longer interest rates and growth in both employment and wages.
“2015 could be the best year for UK stocks since the downturn,” she said, before noting that volatility will remain.
However, she also notes there will be volatility and, importantly not everything will go up.
“Stocks have been rewarded if they have an ongoing commitment to return cash to shareholders, because there remain not a great number of income-generating assets,” she adds.
It is not however, just in the large and mid-caps, that the focus on dividends is increasing. Tuesday’s announcement by Miton of its intention to launch a UK Small and micro-cap investment trust, is largely predicated on the belief that this part of the market offers many of the most attractive dividend prospects.
Gervais Williams, manager of the new Trust explains that as a result of QE
investors are struggling to find areas where returns could be substantial. And, since the late 1980s, the micro-cap sector has seen significant underinvestment.
“With the AIM market down in recent months, even the better stocks have been pushed lower and we see now as an attractive time to get into this market,” he explained.
“There are a number of immature income stocks in this market, they might only currently be yielding 1% at most, but over a three to five year time horizon, that yield could well be 3 or 4%.”
And, he adds: “All markets are struggling at the moment, the UK market will continue to grow, but investors shouldn’t expect much growth overall, nor should the expect much help from overseas.”
