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Old Mutual’s Message: It’s time to ditch equity safe havens

Old Mutual’s Message: It’s time to ditch equity safe havens

Citywire A-rated Old Mutual Global Investors UK Equity Income fund manager Stephen Message (pictured) has resisted buying into outperforming consumer names, as he thinks they are priced for perfection on a strengthening economy.

Message, speaking at Citywire Scotland, explained his fund’s significant underweight to consumer goods, with no exposure to food producers or beverage companies, has been the main driver of its short-term underperformance.

At the end of April, the fund was bottom quartile year to date, falling by 0.1% as the IMA UK Equity Income sector rose by 1.8%.

‘We are still underweight mid caps, although less than we were a year ago, and underweight consumer staples, which have performed very well this year,’ the manager said.

‘The thing that surprised me, and the markets, is we thought we would see a gradual rise in yields, but what we have actually seen is a flattening of the yield curve, meaning safe-haven companies performed better than I anticipated.’

Safe havens are dear

But Message, who has managed the fund for four and a half years, said these names are looking relatively expensive in a world returning to growth.

‘Valuations are priced in for these safe havens. I do not want a lot of exposure to consumer staples or utilities as I don’t want to be holding bond proxies, which perform well when yields have fallen but I struggle to see how they can perform like that again,’ he said.

‘These companies – which were bought for their relative safety – we are not as keen on in a rising bond yield environment.’

Over one year to the end of April, the Old Mutual UK Equity Income fund is second quartile, while over three and five years it is top quartile.

At £126.7 million, the fund is a relatively small player compared with many of its UK equity income peers, which have capitalised on the seemingly limitless popularity of the asset class.

But the fund has grown from being approximately £80 million at the start of the year, buoyed by its historic outperformance.

Message said he could run the strategy, which is overweight the FTSE 250, to £1-2 billion before having to consider any changes.

‘We have seen some inflows, which is good, and the market has been flat so that has not helped us. It has been about performance and that is quite nice, to be able to grow the franchise,’ he said.

Overweight financials

The fund is materially overweight financials and telecoms, with around 10% in HSBCBarclays and Lloyds combined. These are banks Message believes will increase their dividends as the sector rehabilitates itself.

‘It’s the one area where we are still seeing scope for an improvement in the operating environment. It’s tough for these guys, but that’s where the opportunity lies,’ he said.

Meanwhile, life companies Aviva and Legal & General are both among the fund’s top 10 holdings, and the manager is confident they have a bright future, despite the scrapping of compulsory annuities in the Budget earlier this year.

Message took advantage of the ensuing share price weakness and topped up his holding in Aviva, which saw its shares fall by more than 7%.

‘The life companies’ share prices have recovered, it was definitely an overreaction,’ he said. ‘The point of the Budget was to increase the incentive to save for the future and we have more savers in an ageing demographic, so for the likes of L&G and Aviva, we still see demand for retirement products.’

While Message thinks the next year could be ‘choppy’ for markets following the gains made in 2013, he is optimistic that both consumer and business confidence is improving, as we move on from memories of the financial crisis.

‘I have been concerned over the last few months that to drive the economy is not about cutting costs, it’s about companies growing their revenue,’ he said.

‘Companies are looking pretty confident now and we are seeing a resurgence in M&A in the large cap space. People are finally starting to put the past behind them.’

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Stephen Message
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