Aberdeen’s US team has been selling down expensive consumer staples and utilities firms as valuations look stretched amid investors’ search for yield.
Paul Atkinson and Fran Radano, who run Aberdeen’s North American Equity fund and North American Income investment trust, said the valuation measurement of forward earnings showed the market’s average price was 16.8x forward earnings.
While they were “happy” to pay this level, there were areas they said had gone too far and were expensive.
They said low-growth but fairly high-dividend-paying companies, such as utilities and some consumer stocks, had become overbought as income hunters ploughed in.
Co-manager Mr Radano said there were now utility companies “trading at 19x or 20x earnings”.
While the managers believe the US Federal Reserve is unlikely to raise its interest rate until at least September, Mr Radano said high-yielding utilities would come under the most pressure when rates rise.
The Aberdeen managers said they reduced their exposure to utilities three months ago and now only have two stocks from the sector left – retained because they believe they can generate double-digit earnings growth.
The managers have also sold out of a number of consumer staples stocks on valuation grounds, such as Colgate Palmolive, Kimberly-Clark and Genuine Parts.
Mr Atkinson said all three stocks were “great companies” but they had become “too expensive”.
“If they de-rate to move 20 per cent lower and there is no deterioration in the underlying business then we may reinitiate a position, but the stocks got ahead of themselves.
“Buying high-quality companies that are priced for perfection is not a good investment strategy.”
However, the managers admitted some of the stocks in their North American Income trust could also be hit when interest rates rise, as there could be an indiscriminate sell-off of higher-yielding stocks.
But they said the companies should be able to weather such an impact fairly comfortably.
The Aberdeen team has been struggling with performance in recent years on both the open- and closed-ended funds.
The open-ended Aberdeen North American Equity fund ranks in the bottom quartile of the IA North America sector for its performance in the past one, three and five years, according to its latest factsheet.
Meanwhile the investment trust has underperformed the S&P 500 index on a net asset value basis by 28 percentage points since the strategy was changed to target income at the end of May 2012.
Mr Atkinson said the performance of the trust had been dragged down by its weighting towards corporate bonds of up to 10 per cent. The bonds are used as a diversifier but have significantly lagged the performance of the S&P 500 in recent years.
He also said the four Canadian stocks in the fund had lagged, primarily due to the negative impact of the Canadian dollar against sterling.
But he said the Aberdeen portfolios were never likely to outperform in rising markets due to the style of companies they invest in, and a more volatile, low-return outlook should allow them to outperform.
With Paul Atkinson set to leave Aberdeen at the end of May, its North American equity team, located in Philadelphia, is set to undergo a reshuffle.
Mr Atkinson is leaving his role as head of North American equities to relocate to take some time out of the industry.
He will be replaced by current deputy head of North American equities Ralph Bassett, who will also become co-manager with Mr Radano on the North American Income fund, backed up by a team of 11 managers and analysts.
Aberdeen sets up its equity business in regional teams to lessen the impact of manager exits, and the firm said the departure of Mr Atkinson would not lead to any change in the way the funds were run.
