Saracen’s Global Income & Growth fund has experienced a flurry of activity in the first half of this year as managers David Keir and Graham Campbell have noticed a return to value in the US.
The fund usually has a turnover rate of roughly 20 per cent per year, but the managers have estimated this rate may have doubled so far in 2015 as they have bought into a host of US stocks, including healthcare firm Pfizer and multinational conglomerate General Electric.
The venture into US stocks marked a sea change from last year, when the vehicle made a significant switch out of US-based companies on valuation grounds, and into high-quality cyclical European names.
The US underweight contributed to the lacklustre performance of the fund in 2014, which returned 3.1 per cent for the year, less than half the average for the Investment Association Global Equity Income sector.
But the managers said they had struggled to find opportunities in the region on a valuation or yield basis.
“During 2014 we noticed American equities kept going up and getting more and more expensive, particularly consumer names such as Colgate, Kraft and Coca-Cola,” Mr Keir said.
‘They were at more than 20 times earnings as bond proxies, but in reality you are not going to get equity-type returns on their current rating.”
However, this year has marked a reversal of that trend, particularly as the move into European equities has become a crowded trade, making some consumer names in the region look more expensive.
“We switched from the US to Europe in 2014 and a lot of people are now moving into that trade, but we have noticed value coming back in the US,” Mr Keir said.
“Valuations are expanding as investors sell out of the US and into Europe.”
The move has paid off this year as the £50m Saracen Global Growth & Income fund has delivered 5.6 per cent, compared with the sector average of 2.5 per cent.
“We have been selling a lot of stuff during 2015, which is predominantly due to valuation or because the yields were not high enough,” he said.
“But the fact that the markets are elevated does not mean we are not finding pockets of value.”
The managers have found those opportunities in the unloved banks and mining sectors. “We have never owned banks but are dipping our toes into UBS,” Mr Keir said.
“In the past six months, the management has been focusing on improving the quality of its wealth business, and as that comes through the shares should rerate.”
The fund has also taken a small share in Barclays, where Mr Keir expects rapid dividend growth and good things from new chairman John McFarlane, who impressed at Aviva.
The managers have also bought into Rio Tinto and BHP Billiton, the first mining stocks in the portfolio since its launch.
Mr Keir described the mining sector as “massively under-owned” with attractive dividends of 6 per cent.
