Fidelity’s Michael Clark has admitted he underestimated how badly Tesco’s shares would be hit after the company revealed it had been massively overstating its profits.
The holding in the supermarket giant hit the relative performance of the group’s £1bn MoneyBuilder Dividend fund towards the end of the year, as the product underperformed peers in the final quarter of 2014.
Last September, Tesco’s shares fell drastically following an admission that it had overstated its profits by some £250m. The grocer’s shares were down nearly 6.3 per cent by the end of the year, according to data from FE Analytics.
“It developed worse than I thought it would,” Mr Clark said. “It was unfortunate, but it was containable.”
The manager feels it is too late for him to sell the stock, which makes up just more than 1 per cent of his portfolio, he said.
The manager will be hoping the share price gains of 8 per cent in the new year to January 12 – largely propelled by the plans of new chief executive Dave Lewis – will set the tone for the rest of 2015.
Mr Clark’s fund was also hit at the back end of 2014 by oil stocks BP and Royal Dutch Shell, whose shares fell throughout the final three months of the year as the oil price plummeted.
The manager added the two stocks to his portfolio at the start of the year and now BP makes up 3.6 per cent of his portfolio and Shell 3.8 per cent. Both are in his top-10 holdings.
When the manager purchased the stocks, he expected them to be what he called dividend “stalwarts”, predicting that they would deliver share price growth as well as rising payouts to investors.
But in the midst of the oil-price collapse, Mr Clark acknowledged he was not now quite so bullish.
“Their earnings are not going to go anywhere and their dividends will not rise,” he said.
“But since they are the big majors they tend to be resilient and [are diversified businesses], so I don’t expect any significant cuts.”
In spite of these trades hitting performance towards the back end of the year, the fund’s 6 per cent return in 2014 put it in the top quartile of the Investment Association’s UK Equity Income sector, according to data from FE Analytics. The fund is also top quartile over five years.
Elsewhere, the manager said he was keeping a close eye on the mining sector, which has been under pressure in recent months.
In the past year, the FTSE All Share Mining index has lost more than 6.4 per cent compared to a 1 per cent gain for the broader index, FE data shows.
“[The mining sector] is a big question mark since the shares have fallen substantially and they have a decent yield, but I’m going to hold back,” he said.
“They expose the fund to increased volatility. There will be a right time to buy, but I’m just not convinced that we are there yet.”
In general, the manager expects 2015 to be a somewhat volatile year, with political uncertainty in the UK as the election approaches and the prospect of an interest rate rise on the horizon.
