Cornelian director and head of private clients and charities Marcus Brooks explains why select UK equities have powered performance over the past year.
Brooks expects inflation to remain above 2% for the foreseeable future and to average out above 2% for the next decade. As such, he sees little value in fixed income broadly at the moment aside from holdings in a couple of top-performing corporate bond funds, which have attractive yields.
Instead, he has increased the equity weighting in his Medium Growth portfolio to 75%, adding to Europe on valuation grounds through a position in the long/short SWMC European fund.
‘The fact that the management team owns the business means their interests are aligned with ours,’ says Brooks, adding that he thinks manager Stuart Mitchell’s track record is impressive.
Brooks has also been tweaking his commodity exposure, selling his position in BHP Billiton and buying into Rio Tinto. ‘Commodities have fallen a long way, so there is value there,’ he says. He adds that he believes the consensus outlook for commodity demand understates the likely real demand.
However, he has sold out of gold mining fund CF Ruffer Baker Steel Gold and has also taken some profits on physical gold.
The portfolio returned 17% in the year to 5 October, outperforming the 16.7% return from the Apcims Balanced benchmark.
Positions in corporate bonds funds have contributed to the performance, most notably Eric Holt’s Royal London Sterling Extra Yield Bond fund, which is ranked first of 16 in the high-yield sector over the past three years.
‘Royal London is a holding we have had over a long period, largely because it is different. The manager looks for anomalies in the high-yield market and also buys unrated bonds, and he’s performed very well,’ Brooks explains.
He also holds the strongly performing JPM Sterling Corporate Bond fund and likes it for its flexibility. The fund is ranked second out of 17 in the Sterling Corporate sector and has returned 38.2% over the past three years, compared with a 26.2% rise in the Citigroup United Kingdom WGBI TB benchmark.
Performance was pulled down by a position in May Gurney Infrastructure Services, which made losses on some contracts with local councils, and Brooks exited the position entirely.
Global energy company BG Group is a holding that Brooks expects to deliver more positive news than of late as he feels the market is failing to recognise the value in its assets.
‘It has been a poor performer as the production cycle has been called into question, but over the longer term it has a fantastic portfolio of assets which will produce hydrocarbons and growing volumes over the next decade,’ he says. ‘That is not reflected in the share price.’
He also points to UK stocks with steady cashflow and strong balance sheets as those which will drive performance in future, and although a holding in B&Q parent group Kingfisher has not performed as well as expected, he anticipates better news.
‘If the UK housing market starts to improve, which there are signs of, that will increase profitability.’