Mott holds nerve on inflation stocks

Bill Mott has doubled down on his aggressive bet on companies that would benefit from higher inflation, in spite of the stocks’ “dull to outright shocking” returns that have dragged him down the performance leagues.

The PSigma Income fund manager has seen his holdings in what he terms ‘inflation-hedging’ sectors – such as mining – cause him to underperform in the past year.

The fund ranks in the bottom decile of the IMA UK Equity Income sector in terms of its returns in the year to June 27, according to data from FE Analytics, thanks largely to the pro-inflation bets.

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Mr Mott admitted that his gold mine holdings – equivalent to 2 per cent of the portfolio a year ago – had lost half of their value in the past 12 months, wiping 1 percentage point off the fund’s performance.”

He said that another contributor to his poor performance had been a “much bigger bet than my peer group” in oil companies, which he also views as inflation beneficiaries.

“In spite of the oil price being stable, the performance of the oil stocks has varied between dull and poor,” said Mr Mott.

“There’s not really much explanation for why oil stocks have been so poor.

“I thought the Arab spring would create higher oil prices, but that has not translated through to good performance from oil shares, and they have been left behind as other higher yielding equities have been re-rated.”

Many experts predict that the wave of monetary easing that has been launched in response to the global financial crisis in recent years will result in high inflation in developed economies at a future point, but there is no consensus on when that will take place.

Mr Mott said he thought the chances of an inflationary scenario had increased in the past year, saying he was boosting the already 25 per cent weighting in his portfolio to the inflation-hedging companies.

He said he had been buying miners such as battered Rio Tinto, BHP Billiton and Glencore-Xstrata in recent months.

The manager has established a portfolio of different groupings of stocks that reflect particular potential outcomes, one of which is the high-inflation outcome that he believes is now more likely.

He also has a basket of stocks that would benefit if there were a deflationary scenario.

“People should manage money being aware of a variety of outcomes,” he said.

But the manager said that while the risk of higher inflation had increased, he continued to believe that the most likely outcome was that economies would ‘tightrope’ between inflationary and deflationary pressures.

“We think the risk and reward profile is very appropriate for the variety of possible outcomes that confront us. It is not about being top of the charts for any particular period, it is about risk versus reward,” he added.

The manager has returned 15.8 per cent in the past year, underperforming both the average return of 21.3 per cent from the IMA UK Equity Income sector, and the total return on the FTSE All-Share index of 18 per cent.