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The defensive stocks on leading managers' hitlists
by James Phillipps on May 27, 2011 at 00:01
With ongoing concerns around the strength of the economic recovery it is little surprise that investors have been favouring traditional defensive sectors since the start of the year, but with many that is where the consensus ends.
The sector rotation that has marked recent months is increasingly being played in different ways by a number of high profile fund managers.
Pharmaceuticals are a case in point. Bill Mott, manager of the PSigma Income fund, counts GlaxoSmithKline as his largest single stock overweight, with 6.7% of his portfolio invested in the firm. He highlights the value of stable earnings streams and an attractive dividend in the current climate, which he argues will drive a rerating of the stock.
‘As the world recession is coming to an end, the risk of policy error by government is huge. What is certain is that the economic rebalancing required will have a real effect on the markets: it’s a bit like having the flu and we are now left with a blocked nose,’ Mott says.
‘In this bracing and uncertain economic environment, dependability deserves a much higher rating. I firmly believe pharmaceuticals offer this dependability and they are currently greatly undervalued, offering an outstanding opportunity particularly on a risk/return basis.
‘I am as excited about the current situation as I was in March 2000 at the end of the technology bubble. The defensive, high yield, economically insensitive qualities of pharmaceuticals have been overlooked. They offer a better yield than 10-year government bonds [and] represent outstanding opportunities on a total return basis. They could well do what tobacco has done over the past five to 10 years.’
He anticipates Glaxo will deliver 2% to 3% annualised revenue growth over this decade, but says that by holding costs flat and using its strong cash flow to buy back shares this would translate into double digit earnings growth.
‘It has a dividend yield of nearly 6% and will have very little correlation to broader economic activity,’ Mott adds.
Despite strong recent performance from the sector, which has seen both Glaxo and AstraZeneca rise by close to 10% from their February and May 2010 respective lows, several high profile investors remain negative on pharmas.
Simon Murphy, manager of the Old Mutual UK Select Equity fund, is taking a pragmatic approach, blending defensive exposure with a degree of cyclicality in the expectation that market leadership will broaden out.
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