Veteran income fund manager Bill Mott thinks we may be heading for a new Nifty Fifty market. This is a reference back to the 1960s when a relatively small number of stocks dominated the performance tables in the US stock market. Market history buffs will know that talking about the Nifty Fifty is shorthand for saying that equity markets are likely to track sideways within a fairly narrow range, while remaining volatile.
Consequently stock selection will be the only reliable way for a fund manager to outperform the general market indices. If that is right, so called focus funds, which typically hold a concentrated portfolio of 40-50 stocks,could in theory do well, the big if (as always) being the assumption that the fund manager has superior stockpicking skills.
The PSigma Income fund that Bill runs is currently, in his words, “a hybrid between a) defensive UK equities with limited economic sensitivity and b) UK equities which we believe can grow faster than average in a ‘bracing but not impossible’ global economy”. This is how he describes the impact on his portfolio.
“At the stock level, we have tightened the portfolio considerably from over 120 stocks to 70 (and heading lower still) as our views on the future become more defined. We have very limited exposure to pure UK-exposed companies with no General Retailers or Property stocks. We have increased our holdings in defensive areas of the market such as Utilities and Food Retailers”.
“The significant reduction in economically-sensitive stocks has meant that the FTSE mid-250 exposure is now only just over 10% with only 2% in small cap and in excess of 85% in FTSE 100 companies. Headlines and stock positions in the portfolio at present are:
1. Companies which we believe can deliver above average returns in a bracing environment feature heavily in the fund
Examples here include Reckitt Benckiser, Serco, Compass Group, Bunzl, Pearson and Tesco.
2. High sustainable yields will be revalued positively by investors in a ‘yield-hungry’ environment
Examples here would include RSA Insurance Group (Royal & Sun Alliance), Standard Life, BP, Royal Dutch Shell and Vodafone.
3. The fund is still heavily weighted towards overseas earnings
Only 10% of the portfolio has earnings exclusively in the UK, with the majority of these in the food retail, utilities or pub company sectors. Where we have similar companies, we always prefer overseas earnings, e.g. our holding of British American Tobacco is larger than our holding in Imperial Tobacco Group. The biggest holdings in the fund all have significant overseas earnings. For example oil, drugs, mobile telecoms and tobacco.
4. In an anaemic growth environment, we attach great importance to companies with repeat or repeatable earnings: sectors such as drugs, food retail, oil, rail & buses, telecoms, tobacco and utilities all have high levels of repeat revenues and are heavily overweighted in the fund
Examples here are GlaxoSmithKline, Vodafone and National Grid
5. Cuts in Government spending are inevitable over the next few years and therefore outsourcing companies should be a major beneficiary of reduced and more efficient government spend
Our holdings in Babcock, Carillion, Kier Group, Interserve, Serco, Xchanging, Compass and Healthcare Locum should all benefit from this trend.
6. There are always companies which because of their unique business model or management quality are worthy of inclusion despite not fitting in to any of the above themes
Examples here include Cable & Wireless, Tate and Lyle, Reckitt Benckiser, Inmarsat and Premier Farnell.
“In summary, we think that the risks are building of a market correction if some announcement is not made over the next few months to suggest that some of the economic stimulus is being removed. We believe that putting Quantitative Easing on hold would be a good first step and, although the market may react negatively in the short-term, it would signal that the authorities are determined not to let another asset ‘bubble’ develop”.
Jonathan Davis 