View the article online at http://citywire.co.uk/money/article/a636816
AXA Framlington's Peirson: BT in 'game changing' phase
'Multi-asset' fund manager Richard Peirson explains why he likes shares over bonds and is excited at BT Group's development
The AXA Framlington Managed Balanced fund is one of our Citywire Selection picks. We spoke to Citywire A-rated fund manager Richard Peirson for an update on what he is doing with the fund and his thoughts for the future.
Positive on global equities
Some 78% of the £390 million fund is in equities or shares, with 12% in cash and just 10% in bonds as Peirson thinks bond prices will fall and their yields rise dramatically within the next couple of years.
He told Citywire: ‘Outside of banks, the corporate sector is in great shape. There is probably more than £1 trillion sitting in treasurers’ accounts waiting for a bit more comfort. When we see that, there will be a huge pick-up in capital expenditure and mergers and acquisitions activity.’
Conversely, he sees little upside for bond markets. ‘I have a very cautious view on bonds because we think yields on 10-year [UK gilts] will go from 1.8% to 3.5%. We don’t know exactly when, whether it is 2013, 2014 or 2015, but we are sure it will happen.’
Within the bond holdings, Peirson has 8% in gilts, split evenly between index-linked and conventional bonds. He has kept the average duration of these relatively short as he has concerns that further out, the ultimate effect of more rounds of quantitative easing is likely to be inflationary rather than deflationary.
His only other position in the asset class is a 2.5% position in short-dated German bunds, which he describes as the ultimate safe haven if the euro breaks up, but he believes this to be unlikely. ‘We are not overly concerned the euro will break up because we believe the political will to keep it going at all costs is sufficient to keep it together. But if we are wrong, the one area that will do well is going to be German bunds.’
High cash weighting
Peirson says the fund’s 12% cash weighting is the highest level it has been since Q1 2009. ‘We might spend a little more of this on equities and at some stage that will happen, but this is a balanced fund, so for now we are using the cash buffer as insurance against any further sharp falls in the market.
In his equities portfolio, Peirson continues to favour companies with a domestic UK focus, many of which he believes to be on relatively more attractive valuations than their more internationally-oriented peers.
About 40% of the equities portfolio is in UK-listed stocks, with a further 14% each in Europe and North America. His biggest single holding is the AXA Framlington Emerging Markets fund, which makes up around 3.5% of his fund and offers ‘a diverse spread across all emerging markets’.
‘It is the only place where we use a unit trust as it gives diverse exposure. Normally we like to buy international shares.’
Peirson has done relatively little in recent months to his equity holdings, but has been adding to his UK-focused housebuilders, buying Persimmon (PSN.L) and Barratt Developments (BDEV.L), because he thinks the sector looks relatively well placed for modest growth.
During the summer, he also added to his position in Lloyds (LLOY.L) bank. ‘We like Lloyds just because it is a UK-focused bank.’
Another key equities theme is the explosion in smartphone and tablet technology as well as the explosion in data storage needs. Peirson is playing this through data storage specialist Telecity (TCY.L) and also through a top 10 position in BT (BT.L).
BT in 'game-changing ' position
'BT has been a poor growth story for a long time but the catalyst this year was European and UK regulation on charging being relaxed as governments are desperate for further investment in fibre and broadband.
‘We think this is a game-changer for its business in the UK. Its [share price] has been flatlining, but now we expect strong growth from a low base, and it also has a strong balance sheet.
Another key holding is silicon chip manufacturer Imagination Technology (IMG.L), which is in demand because it makes the components needed in smartphones and tablets.
Peirson admits to being ‘reluctant’ to pay high multiples for growth stocks but believes Imagination Technology is an exception to the rule. ‘It has been growing at 40 to 50 times earnings and I am always reluctant to pay that, but it is at the forefront of technology and peaked at around £7. It is now at £4.60, but its potential is huge.’
He also bought special situations stock ITV (ITV.L) on a view that the broadcaster's strong management team is well placed to ‘run its business better than it has ever been run’. ‘It is just starting to benefit from a more aggressive approach to its online advertising. It has a strong balance sheet and is still able to cut its costs further.’
Over five years to the end of October, the fund has returned 16.8% compared with the LCI UK Balanced & Intl Equity (50:20:30) benchmark return of 8.5%.
Citywire Selection Verdict:
This is a relatively aggressive mixed asset fund, with a high weighting to industrial companies and investments in North America and Europe. This is balanced out by Peirson consistently selecting high yielding companies with strong barriers to entry. With the equity/bond and cash split at 80:20 it will always do well when a recovery is on the cards, but it should also not get carried out if pessimism abounds. The manager has one of the best track records around.
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Look up the shares
- Persimmon PLC (PSN.L)
- Barratt Developments PLC (BDEV.L)
- Lloyds Banking Group PLC (LLOY.L)
- BT Group PLC (BT.L)
- Telecity Group PLC (TCY.L)
- Imagination Technologies Group PLC (IMG.L)
- ITV PLC (ITV.L)
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by Daniel Grote on Sep 02, 2014 at 10:16