Yarrow overhauls fund to target smaller firms
Toppy valuations on some large-cap names have prompted UK equity income manager Hugh Yarrow to target a slew of small-cap positions.
The manager of the top-performing Evenlode Income fund, which has produced top-quartile returns across one-, three- and five-year periods, said stark movements in individual shares had prompted an overhaul of his portfolio.
“Many larger and more stable businesses have performed extremely well in the past year,” Mr Yarrow said.
The manager said towards the back end of last year he had sold out of pharmaceutical Novartis and medical equipment company Smith & Nephew.
He had also “significantly reduced” his exposure to consumer goods firm Reckitt Benckiser, beverage company SABMiller, publishing business Reed Elsevier and support services business Compass.
With the proceeds, Mr Yarrow said he had targeted several mid caps and smaller companies – such as Spectris, IMI, Informa, Paypoint, PZ Cussons, WS Atkins and Mitie – as well as “significantly adding to several existing holdings on share price weakness”.
“These companies fulfil our quality criteria and offer good potential for long-term dividend growth,” he said.
“But they have been out of fashion recently for various reasons, which has improved valuations.”
The manager said the potential returns on offer from stocks were “declining”, but that they remained the “best house in a bad neighbourhood”.
“Starting dividend yields of 3-4 per cent for sensible companies are still available across European markets, including the UK,” Mr Yarrow said.
“These yields do not stand out on the slide rule of long-term history, but they do stand out as an oasis in the desert of yields available on cash and bonds.
“They also have the potential to protect investors from inflation if and when it picks up again – neither of which is something cash and bonds can deliver.”
While the Bank of England has a 2 per cent inflation target, data released last week showed the consumer prices index measure of inflation hit zero for the first time since data has been collected from 1989.
Mr Yarrow said he followed a value-based investment approach, which often resulted in him “moving in the opposite direction to the crowd”.
“In 2012-13, we moved towards the larger and more stable businesses that were underperforming a risk-taking market hungry for smaller stocks,” he said.
“This benefited our performance in 2014, as the market became more risk adverse.
“More recently, we have been active in terms of making changes to the portfolio, driven mainly by volatility in individual shares.”
