Six months since taking over the fund from Charles Deptford, Frikkee has introduced an overweight in mining stocks at 7% of the portfolio. Key positions include Rio Tinto and recent addition BHP Billiton.
‘Rio Tinto has never been cheaper, but again it will never get to BHP Billiton’s multiples. They both make a return on capital but BHP Billiton has the most stable margins over time,’ she explained. ‘BHP Billiton has a strong balance sheet, good valuation and my sense is that it could meet and beat expectations in 2014, on the back of a rising global GDP growth.’
She takes the view that outflows from the bond propositions of both asset management arms ‘can be absorbed’.
She also views St James’s Place as a beneficiary of the advice gap, which some commentators argue has grown as a result of the retail distribution review as some high street banks and advisers withdraw from the market.
‘Even though they have been doing this for a long time, it has accelerated. Growth has really kicked in and beta has won, moving in line with the market,’ Frikkee said.
Insurance consolidator Resolution, which has a dividend yield of 7%, has growth potential in her view, although she does not anticipate further dividend rises.
Doubling bank allocation
She has nearly doubled her allocation to banks to 8.5%, notably with the introduction of a position in Lloyds, equating to 2% of the fund. Speaking ahead of Lloyds’ results, the manager expected the bank, which she bought this summer, to introduce a dividend later this year.
‘It could really ramp up to 4.5%… but I’m quite cautious and want to see what Lloyds will do with its yield in February. Growth will be on their side, particularly through the Help to Buy mortgage market.’
This, Frikkee says, could also spark a rerating.
The manager also describes the fund’s holding in Barclays as a higher beta play. She expects shareholders to be rewarded with a rerating on this bank holding as well.
On HSBC, which is Frikkee’s fourth largest holding at 2.6%, she anticipates 15% upside.
‘The bank is quite interesting because it will never be a high grower but profitability is improving.’
Pubs and buses
Frikkee favours travel and leisure stocks as beneficiaries of the UK recovery. She is allocating 11.1% to these types of companies and cites Easyjet as a good example of a ‘hugely’ cashflow generative company, paying both base and special dividends.
In leisure, Frikkee also holds Marston’s Brewery, which she added looks attractive as a result of a better diversified business mix.
She explained growth could come from the firm’s decision to serve food at the cheaper end of the scale.
‘Also, it is more Midlands-based, so I am quietly hoping the more depressed areas will hopefully start feeling a bit wealthier,’ she explained.
Keeping on track
More recently, Frikkee took profits on Go Ahead. ‘Investors thought shares were attractive when the firm was at £16.50 but they are now at £19.87, so it’s done its thing.’
She has retained an exposure to bus company National Express, which she says has a more diversified business model than some might anticipate.
Indeed, two thirds of its revenues come from its UK bus and train operations, alongside the US where the firm provides a complete range of school transportation.
‘Because it is funded by the state, if the US economy overall does better, that tends to go into education, which will give the stock an upside.’
A further 33% of the business is in Spain, where the firm had to address labour costs to make them more competitive.
Since Frikkee took over the fund six months ago, the Smith & Williamson UK Equity Income Trust has returned 15.1%, compared to 12.1% by the IMA UK Equity Income sector. By comparison, the FTSE All Share index rose 11.4% over the same period.
Over six months the fund, which has a 4% yield, has seen its assets grow £4.6 million to £12.9 million.