A number of UK fund managers have said there is no certain or reliable way to achieve returns, claiming that getting the balance between value and quality is like “walking a tightrope”.
The UK’s base rate is now at a record low of 0.25 per cent, and it looks increasingly likely the current low-yield environment will continue for longer than the market expected before the shock Brexit vote on the 23 June.
When FTAdviser asked wealth managers which funds they rely on to ensure returns for their clients, many pointed to equity offerings and claimed dividends are an “investor’s best friend” in a low rate environment.
Nick Train, who manages the £2.7bn Lindsell Train UK Equity fund, said in these economic conditions, the only way for companies to make progress is to innovate by finding new or better ways to do business.
For equity investors, there is no certain or reliable way to achieve returns Nick TrainHowever, he said innovation is “inherently risky”, adding: “This means for equity investors like us there is no certain or reliable way to achieve returns.”
There are large rewards out there for companies that make successful bets on the future, said Mr Train, pointing to the gains in internet and biotechnology stocks.
“Equity investors can be optimistic, but they should also beware of complacency, either their own or that of the companies they invest in.”
Hugh Yarrow, who co-manages the £934m Evenlode Income fund, said he looks for asset-light businesses which have low capital investment requirements, such as branded goods companies, or software and engineering businesses with a lot of intellectual property.
“We look for companies with a strong economic moat, and which often have intangible assets that are difficult for other companies to replicate,” he commented. “Bad things can happen and you want the companies you invest in to be able to cope with a wide range of outcomes.”
Mr Yarrow admitted valuations are less attractive now than they had been two or three years ago.
“There is a point where you have to accept the returns aren’t going to be as good as they have been in the past and be realistic about it.
“If you try and reach too high for a return, then you can end up sacrificing too much quality and then you end up with a risky portfolio full of companies making dividend cuts and cancellations, which is not where we want to end up.”
He said it is “walking a tightrope” between quality and value, ensuring neither is sacrificed for the other.
The Evenlode manager also agreed with Thomas Moore from Standard Life’s statement about companies using debt to pay dividends, adding it wasn’t limited to large companies.
“Because debt is quite cheap at the moment, there is a temptation for companies to use that to artificially juice up earnings growth and to keep shareholders happy by continuing dividend payments,” commented Mr Yarrow.
Andrew Wheatley-Hubbard, co-manager of BlackRock’s £1.9bn Global Equity Income fund, said it is important to find businesses that can internally fund their own growth and are not dependent on external macro factors.
“These companies are more predictable, more resilient and best equipped to navigate challenging markets,” he said, adding investors need to be patient to benefit from the long-term growth.
Ariel Bezalel, who runs Jupiter’s £3bn Strategic Bond fund, said high-quality, highly liquid government bonds play an important role within his strategy.
“We currently hold a significant allocation to longer-dated bonds in markets where we think there is scope for additional upside,” he said, adding longer-dated sovereign debt acts as a counterweight to his credit positions.
Over the past 12 months his sovereign holdings have added steady value during risk-off periods, which have helped dampen the fund’s overall level of volatility.
“We continue to pursue this strategy as we believe that further sharp swings in sentiment, such as those which took place periodically in bond markets in the first half of the year, are likely in these uncertain economic conditions,” added Mr Bezalel.
Alastair Caw, head of UK wholesale distribution at Columbia Threadneedle Investments, said the firm’s £3.4bn UK Equity Income fund is comprised of businesses which have free cash flow and “contrarian recovery positions”.
He stated: “We generally hunt for ideas in the top of the mid-caps and bottom of the FTSE 100 indices to deliver a broad portfolio with a degree of differentiation from our peer group, who often look to mega cap securities in search of yield.”
katherine.denham@ft.com
