Stay connected:
Citywire printed articles sponsored by:
View the article online at http://citywire.co.uk/wealth-manager/article/a630147
RWC’s Ian Lance: beware the stampede to income
Markets
by Emma Dunkley on Oct 29, 2012 at 13:56
Ian Lance, co-manager of the RWC Income Opportunities fund, believes investors getting caught up in the rush for income risk loading up on low quality companies that are unable to sustain dividends.
Lance said the utilities sector in particular is riddled with low quality companies that do not generate cash and therefore borrow money to pay out dividends, which is unsustainable.
‘They tend to have horrific balance sheets,’ said Lance. ‘So with the stampede to income, people only focus on the dividend yield and load up on utilities.’ He added that utilities are expensive, highly leveraged and too heavily regulated to make a good return on capital.
National Grid, SSE and United Utilities, for example, have price to earnings (P/E) ratios of 13.5 times, 12 times and 15.2 times respectively, and offer dividend yields of 5.7%, 5.9% and 4.5%.
Lance highlighted that other sectors carry significant earnings risk, which can thwart dividend payments.
‘We have no interest in mining companies,’ he said. ‘One year, P/E ratios are quoted a lot but you look at earnings and they are at all-time highs – so a high P/E on a business with high earnings.
‘But we think earnings will come down everywhere – in the US, Europe and the UK.’
According to Lance, expensive defensive stocks are another area of which investors should be wary. ‘Lots of investors are nervous, so go to safe havens such as consumer staple stocks, which typically have price to earnings ratios of 19 times and yields of under 3%,’ he said.
‘That part of the market is quite expensive. The bottom end of the market is cheaper but poor quality and higher risk. Mining stocks and banks are not of interest, what we look for is in between – a thin wedge.’
Coca-Cola, for example, is trading on a P/E of 19 times and yielding less than 3%, Procter & Gamble 17 times, yielding 3.4% and Nestlé at 18 times, 3.5%.
News sponsored by:
Subscribe to Wealth Manager to get the inside track on your rivals' moves
Keep up to date with how your peers are allocating their clients' assets by subscribing to Wealth Manager magazine.
Today's top headlines
More about this:
Look up the funds
Look up the shares
Look up the fund managers
Archive
Aberdeen Live supplement: Fundamentals point to ongoing flows and solid returns from EMD
After a record year for inflows and market-leading performance in 2012, emerging market debt has taken a large step towards the mainstream. Our recent debate covers the outlook for the asset class this year and where opportunities can be found.
On the road
Click here to find out more from the Audience Development team.
leave a comment
Please sign in here or register here to comment. It is free to register and only takes a minute or two.