Despite markets reacting positively in the days following rounds of quantitative easing, Frikkee said she doesn’t see the money printing programme having ‘any significant effect’, mostly since the consumer is still holding back.
As such, she is adamant corporate earnings growth forecasts for next year – currently at around 10% – are simply too high, and she has been reorientating the portfolio towards companies that have less forecast risk.
‘The more cyclical stocks are issuing profit warnings, those sectors that are exposed to the more discretionary end. People aren’t buying them any more, earnings forecasts are just too high,’ she said.
‘We do think the market is expensive, we think there is too much forecast risk and that is why we have a low number of stocks.’
Frikkee is currently running just 51 positions in her £2.2 billion fund that has returned 15.81% compared to 13.96% in the FTSE 350 Higher Yield TR benchmark over the past 12 months.
Some 85% of the fund is invested in the FTSE 100, but Frikkee’s concern over future profit warnings has seen her up her cash weighting to 8%, close to the 9% high it reached in September 2008 in the aftermath of the collapse of Lehmans Brothers.
Some of this has come from taking profits off a significant overweight to a number of water companies, including United Utilities and Severn Trent. ‘They still fit the box for us in that they are relatively non-discretionary products but you would be surprised, the demand for water is going down. We had big overweights in them and we wanted to take some out.’
Money has also been taken out of Vodafone, although it remains a significant holding. ‘We felt earlier in the year it had done very well and it is a well-managed company but earnings forecast risk has started to creep up on it,’ she said.
Profits have also been taken on Imperial Tobacco, as while its latest trading statement showed ‘quite comfortable’ results, Frikkee is concerned about smokers switching to cheaper brands. ‘The affordability [of cigarettes] in the UK is starting to get quite stretched. We are still overweight though, as we think the valuation is okay.’
One stock she believes is fair value while offering interesting growth prospects is Intermediate Capital, a firm that provides mezzanine financing for businesses in Continental Europe.
‘You get good prices on this one. There are not many banks that are able to provide short-term financing. Clearly there is risk but there are a lot of decent European companies,’ she said. ‘They are extremely cautious, they will always have a few companies where it doesn’t work out but you can budget for a few to go wrong.’
Like many managers, Frikkee is underweight banks, but she picked out Aberdeen Asset Management as an example of a quality non-bank financial stock.
While she agreed the stock is probably fair value at the moment, she maintained it has strong growth prospects based on its successful business model which has included bolting on acquisitions successfully.
‘It’s a company that has its products and main money-makers in good places. They’re strong in equities, strong in emerging markets and they are seeing a shift where money flows out of lower margin products and into higher margin products.’
Frikkee continues to back GlaxoSmithKline, the fund’s second-largest holding at 8.3%, because she believes the company is taking a ‘slow but steady’ approach to new products.
‘The objective is to get a higher number of medium-sized drugs out rather than looking for the needle in the haystack blockbuster.
‘It is becoming a growth company. Many of those companies are hitting their patent cliff but Glaxo is coming out so we are going to see earnings growth.’