The manager of the only fund in the UK Equity Income sector to achieve positive returns in the days following the UK’s decision to vote for a Brexit has revealed how he managed to deliver these returns,
Christopher Metcalfe manages the £1.6bn Newton UK Income fund, which according to FE returned 1.11 per cent between the end of 23 June and close of play on Tuesday (28 June).
Every other fund in the sector recorded negative returns, with particularly bad performers including MFM Slater Income, which was down 12.18 per cent, Premier Optimum Income, which was down 12.17 per cent and Chelverton UK Equity Income, which lost 12.09 per cent.
Mr Metcalfe said: “Going into the referendum we had an open mind as to the result, but felt there was a real possibility of a Leave vote given the strength of anti-EU feeling in the towns of Northern and Eastern England allied to the euro scepticism of older generations.
“We felt that, whatever the outcome of the referendum was to be, the UK economy was in for a prolonged period of little economic growth and low interest rates.
“Therefore the portfolio was positioned to prosper in this type of environment. We remain overweight in areas such as professional media, tobacco, utilities, technology and healthcare.
“We continue to be very underweight in financials as we feel they are going to continue to underperform in the economic conditions that we foresee; we view banks, for instance, as leveraged cyclicals which will continue to struggle in a low interest rate environment.”
Mr Metcalfe added the fund does not have exposure to some other more cyclical areas like industrials, mining, housebuilding and property.
He said it is also overweight in areas of low capital intensity and focuses on companies with high and sustainable free cash flow yields.
The largest fund in the UK Equity Income sector is Woodford Equity Income, with £8.5bn in assets, which was among the top 10 performers but also made negative returns at minus 3.29 per cent in the days after the Brexit.
Charles Younes, research manager at FE Research, said Newton UK Income’s top performance goes back further than just the past few days.
He said: “In fact the fund has managed to post positive returns over the past year (up 10.64 per cent) compared to both its benchmark (minus 1.18 per cent) and its sector (minus 3.93 per cent).
“This may have something to do with the fact that it has lower exposure to financial stocks, whereas its peers are heavily overweight in the sector. Financials, alongside housebuilders, have taken a massive hit post-referendum.
“The fund’s allocation to utilities helped a lot after the Brexit vote – these stocks are ‘bond proxy’ so did well as yields on UK Gilts fell.
“Overall the manager has done very well over the last year as his portfolio was not impacted by the mean reversion trends on UK Equity markets.
“He did well last year because of his allocation to tobacco names and underweight to mining/oil and gas sectors. This year, the fund was supported by its allocation to utilities.
“The portfolio has the likes of British American Tobacco, Imperial Brands and National Grid in its top 10 – stocks which have all rise in price post-Brexit announcement.”
