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Schroders’ Matt Hudson slashes recovery stocks in defensive turn
by Robert St George on Feb 25, 2014 at 14:24
He is also bullish on BT’s dividend growth prospects. ‘BT historically was seen as a utility. It didn’t have any growth, it had a high yield and it was very dull. Now it is trading just below a market yield, but it has fantastic dividend growth.
‘Over time the management has done a good job of taking costs out of the business and sorting out some of the balance sheet issues.’ He anticipates 12-14% dividend growth for the next couple of years.
Finally, he highlights Legal & General. ‘It was trading at a big discount to book value at the beginning of the cycle. It has rerated since that point, but they have been very good at driving cash flow and using that to drive dividend growth as well.’
The former Cazenove team has advocated business cycle investing for many years now, but doubters have questioned whether such a neat model can apply in a world of distorted monetary policy. However, Hudson says it is still relevant.
‘This is a practical and consistent way to think about running money. If you have ignored the business cycle, then at various points it will have potentially had some quite detrimental effects on your underlying portfolio.’
His own performance attests to that. The fund has returned 60.3% over the past three years, compared with an average 36.8% from the IMA UK Equity Income sector and a 31% rise by the FTSE All Share index. He ascribes half of those returns to the business cycle process and half to stock picking.
His strategy is informed by leading indicators of economic activity and sentiment, which he builds into a portfolio based on how stocks are positioned relative to what is coming.
‘What you’re really looking at is change factors: changes in consumer confidence or the new orders element of industrial production data. We’re not saying we know what the UK’s GDP will be next year, but you can see the direction of change. What unlocks it is looking at the valuation of companies relative to that change.’
‘At some point in the future these are the assets we’re going to want to own, but at the moment we find better opportunities elsewhere,’ Hudson said. He also stresses the importance of adhering to the business discipline.
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- Rio Tinto PLC (RIO.L)
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- BT Group PLC (BT.L)
- Legal & General Group PLC (LGEN.L)
- HSBC Holdings PLC (HSBA.L)
- Diageo PLC (DGE.L)
- BG Group PLC (BG.L)
- Bhp Billiton PLC (BLT.L)