BlackRock’s Wharrier gears up for UK rate hike

The manager of the £326m BlackRock UK Income fund said interest rates were “not likely to leap up”, in part due to middling economic growth. But he has positioned his fund with an eye on the higher interest rate environment he thought would ultimately emerge.

The UK monetary policy outlook remains uncertain after the Bank of England struck a dovish tone in its November inflation report, warning CPI inflation might not achieve its 2 per cent target for two years as falling commodity and import prices offset wage growth.

In the meantime, Mr Wharrier is focusing on stocks he sees performing well, regardless of either an eventual tightening of policy or the current lack of economic growth.

He said: “Two years ago we wanted to do something different. We don’t expect the economy to give us a lot of help.

“The UK recovery is quite mature, so it’s difficult to see positive surprises. We want companies that aren’t reliant on [a] strong economy.”

The fund’s performance has improved since Mr Wharrier implemented this strategy upon joining co-manager Adam Avigdori in November 2013.

The vehicle has delivered 18.4 per cent since then, compared with the Investment Association UK Equity Income sector’s average return of 9.8 per cent.

The managers focus on stocks with healthy free cashflows, which make up 70 per cent of the portfolio, as well as growth holdings (20 per cent) and turnaround stories (10 per cent).

Among Mr Wharrier’s favoured firms are what he dubs “cashflow compounders”, or companies that can continue to grow and deliver capital in spite of higher interest rates.

He said: “We want firms with pricing power that can continue to grow in a higher interest rate environment. We do not have utilities or real estate, but we like tobacco and have bought British American Tobacco and Altria Group.”

Other firms in this category include Next, Intercontinental Hotels and broadcaster Sky, because they “have lots of free cashflow [and a] history of returning that to shareholders”.

Similarly, Mr Wharrier thought banks could leave their industry-wide problems behind them and start giving greater rewards to shareholders, unlike other sectors such as oil.

The manager, who holds HSBC, Lloyds and Barclays, said: “This is a period where lots of investors are using their rear-view mirrors to analyse what’s happening in banking.

“We look at sectors such as oil and pharma and ask if the dividend is going to be sustainable, but with banks we think it’s going to rise. The banking sector should benefit from the interest rate rises because they have big deposits.”

Elsewhere, Mr Wharrier is seeking companies likely to have unusually high levels of growth for the current environment. These include recruitment firm Hays, which he thought would benefit from a gradual rise in wage growth.

He is also keen on possible “self-help” stories that could be unaffected by changes in the broader environment.

These include pest extermination firm Rentokil – which he said would fare well regardless of poor economic conditions – and cruise company Carnival.

He noted the latter’s core clientele of over 65s were much less sensitive to interest rate rises than other segments of the population.