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A global income tour with four top fund managers
by Robert St George on May 08, 2014 at 07:00
Wealth Manager hears how four prominent investors are navigating what has been a testing time for equity income managers.
Oil and gas
‘Of the commodities that you can invest in, oil is the least China-centric,’ he said. ‘The fact that the capital expenditure profiles of many of the big integrated oil companies are beginning to decline and the fact they are beginning to deploy their capital more rationally makes for really quite an interesting investment case. Returns on capital in those industries should improve.’
Harries added that the industry should also benefit from any geopolitical tensions, such as the impact of Russian sanctions on gas exports.
‘It probably gives further credence to our integrated oil company thesis. Many of the businesses in which we invest have assets in relatively stable parts of the world, such as Statoil,’ he said. ‘These will look very valuable at a point when gas is going to be rather harder to come by.’
His top holding in the sector at the moment is Centrica, representing 2.5% of the fund.
Citywire A-rated Will James, manager of the £2 billion SLI European Equity Income fund, has been underweight banks for the past five years. But now he is seeing a medium-term opportunity in the sector.
‘We have struggled, and rightly so, with the fallout from the financial crisis and post the sovereign debt crisis. Europe remains over-banked and the banks faced regulatory headwinds. There was a move towards building and holding capital, but that is now all well understood,’ he said.
However, his preference is for quality names rather than peripheral value plays, so he is prepared to pay steeper price multiples.
‘It is not that we do not like any bank at all. There are banks – and this is dependent on the business model – which have been strong performers through the crisis,’ James said. ‘This is really driven by the ability of these companies to be conservatively run, to be in the right areas, and also to be able to continue to grow.’
One such is Handelsbanken, which recently paid a special dividend. ‘Although it looks expensive relative to the rest of the sector, we are quite happy to have it in the portfolio. We have confidence in the management team, in the company structure, and in the dividend-paying ability, so we think a premium is justified.’
Cheap Asian stocks
‘By looking for companies that are trading at the low end of their 10-year valuation range, we are starting to see more Asian companies arise in our screen than we have for the past three years,’ he said.
Page has duly initiated a stake in outsourcing specialist Li & Fung. ‘It’s an interesting example of a company that is listed in Asia but the majority (over 80%) of its revenues come from outside Asia,’ he said.
‘Li & Fung is trading at the low end of its 10-year valuation range, partly due to general fear surrounding China and emerging market-listed companies, and partly because the holiday season in the US was a little disappointing.’
Page agrees that a temporarily depressed valuation is probably justified given that the group booked a restructuring charge last year on its US arm, but points instead to its longer-term record.
‘We have to remember this is a company that has a 10-year history of generating top-quartile returns on capital, and it weathered the financial crisis extremely well.’
Cash (and an advertiser)
Dan Roberts, manager of the £84 million Fidelity Global Dividend fund, argues that a ‘paucity of value’ in markets is a good reason to remain on the sidelines at the moment. His fund currently has a 6.6% allocation to cash.
He has therefore been sticking with companies he has long favoured rather than deploying capital into new holdings. Roberts has even clung to his third largest holding despite it engaging in one of his least favourite activities, M&A.
‘It’s a merger of equals, so they are not paying a premium,’ he said of Omnicom’s union with Publicis. ‘I am relatively neutral. It is a big corporate transaction, which I have a general aversion to, but there is no value being paid away so I am relatively comfortable with it.’
He expects the merger to deliver broad cost savings, without undermining the attractions of Omnicom’s strong balance sheet and good franchise.
‘One of the reasons for investing in Omnicom initially was just how resilient its operating metrics have proved to be across an economic cycle. If you look at the operating margins for Omnicom, despite the fact it is in traditionally what you would consider a cyclical sector, they have proved extremely resilient.’
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