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Peformance review: Walker Crips turns bearish on UK equities

Peformance review: Walker Crips turns bearish on UK equities

Chris Kitchenham, head of Walker Crips Investment Management’s private client unit, has turned bearish on UK equities after strong performance from the firm’s managed intermediate portfolio large cap allocation.

‘While the IMF has increased its GDP growth forecast for 2014 to 1.9%, we view this as a temporary phenomenon as deficit reduction and austerity will continue to bite the UK consumer over the next few years,’ he said. ‘The recovery is not in manufacturing and only partially in construction and the “consumer led” recovery is not sustainable.’

While Kitchenham holds 21.5% directly in large caps, such as BP and GlaxoSmithKline, he also has a 1.5% allocation to the Franklin UK Smaller Companies fund, run by Citywire AA-rated duo Mark Hall and Paul Spencer.

Although still bullish on US equities, Kitchenham has taken some profits and moved his exposure down to 8.5% over the last six months.

This is held through the JP Morgan US Equity Income fund, run by Citywire +rated Clare Hart, and the Brown Advisory US Equity Value fund.

Some proceeds have been recycled into European equities, with Kitchenham recently buying into A-rated Feras Al-Chalabi’s Odey Continental European fund, which now sits alongside his existing position in the Fidelity European Values trust.

‘The key signal there of a turning point on the euro is that bond rates in fringe countries such as Spain, Italy and Portugal have started to fall after a peak last year,’ Kitchenham said. ‘There is a sense a recovery is taking hold.’

The Odey fund is a more ‘go-go’ allocation, he said, while the Fidelity trust is ‘a large cap boring investment trust sitting at a discount to its asset value invested in the who’s who of European large caps, which is where you want to be’.

Additionally, Kitchenham is positive on Japan, where he upped his allocation to 4.5%, backing Abenomics to kickstart the economy.

‘We see this pushing the market higher, but with the possibility of losing money through a weakening yen. We have therefore purchased Polar Japan [run by AA-rated duo James Salter and Gerard Cawley], hedged back into sterling. This is an unusual situation for us to give away part of the diversification, but we see this as a unique situation,’ he said.

On the alternatives side, he has a 5% allocation to infrastructure, which he favours for its stable cash flows and growth potential.

Kitchenham also holds the Bilfinger Berger Global Infrastructure and International Public Partnership investment trusts.

Within fixed income, he is bearish on corporate and high yield bonds, which he deems overvalued, but has added to his 8% strategic bond exposure with the recent introduction of the Alliance Trust Dynamic Bond fund. ‘We like the team’s style, as they are willing to sell the duration down with a derivative overlay to protect the capital, therefore providing genuine diversification for the portfolio.’


Over 12 months the portfolio has returned 6.6%, underperforming its FTSE Apcims Stock Market Income Index benchmark, which rose 10% over the same period. Since inception in June 2012, the model is up 15.09%, with standout performers including direct holdings in PrudentialVodafone and Aberdeen Asset Management.

The asset manager’s price has more than doubled over the last three years, while Vodafone’s decision to sell its stake in US mobile network Verizon Wireless back to the parent company has resulted in its share price rising by 25% since July, he said.

However, his 2% allocation to Unilever has hampered performance on the back of weak emerging market growth, and it has fallen by 11% since the summer.

On the flipside, he said, performance was also helped by his allocation to Centrica, which he halved when the stock was nearly 400p.

‘Although Unilever has been a disappointment we back the quality stock, while Centrica has had a sharp descent in prices to 320p from 395p, [following comments from Labour’s Ed Miliband, who said he would freeze energy prices if elected in 2015],’ he added.

Exposure to emerging market debt has been another hindrance to performance, but Kitchenham remains reasonably confident investors ‘overreacted’.

‘No one is happy they have held EM debt, after the central bank-led stampede out, but we will continue to hold it.’

He expects more volatility in the markets and anticipates the FTSE will be range-bound between 6,500 and 7,000 in 2014, with both equities and bonds delivering low returns until at least 2015.

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28/47 in Equity - UK Smaller Companies (Performance over 3 years) Average Total Return: 55.75%
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