Jamie Forbes-Wilson, manager of the £82.7m Axa Framlington Blue Chip Equity Income fund, has been rotating away from consumer staples on the view that the sector has “got ahead of itself”.
The manager has been taking profits in consumer staple companies such as Diageo following a year in which the sector has had a spectacular run. The cash, he says, is being deployed in unloved areas such as financials.
“In terms of anticipation of greater income requirement, banks have definitely come back on the radar. HSBC has been talking very positively about the continuation of its dividend growth and hopefully an acceleration of that. Perhaps more topical is the prospect of Lloyds coming back to the dividend register,” he says.
The fund, which has a target yield of 115 per cent of the FTSE All-Share index, has to invest a minimum of 70 per cent in FTSE 100 companies, known as ‘core holdings’, with the remaining exposure allocated to FTSE 250 mid-cap stocks (‘satellite holdings’).
Mr Forbes-Wilson claims to have a “positive tilt” on the market, and, as part of the initial stages of the investment process, he will look at the universe of available stocks based on yield characteristics. He then looks at the macroeconomic conditions that will affect that yield in the future.
He explains: “A case in point would be exposure to one of the housebuilders like Galliford Try, which has stipulated that it will be increasing the cashflow to shareholders in the next couple of years.
“Similarly, [materials firm] DS Smith is a company I have held for three years. It has had a new chief executive, Miles Roberts, who came in from McBride and installed the virtues of dividends being the primary return to shareholders. He has been systematically increasing the payout ratio and making growth a key characteristic.”
In addition, the manager cites Legal & General as another prime example where “cashflow has been a very strong story in the past couple of years” and he suggests scope for increases in the next couple of years.
The fund is typically made up of between 45 to 60 stocks and the manager asserts that he is not “ultra defensive” in style.
“The way in which I run it is not an ultra-defensive 25 per cent in tobacco and another 25 per cent in pharmaceutical,” he says. “This year in ‘dividend land’ there has been some quite significant changes going on and big themes – both positive and negative. The big negative has been large-cap oils, which have been value traps; much of the anticipated cash returns have been more limited than people were hoping for and it is difficult to see what will be the major catalyst for change in the near term.”
He adds, however, that one area that has been particularly good is the media sector.
“ITV is a case in point. The management has been following a five-year recovery plan and it has grown its dividend quite substantially and even announced a special dividend this year, which was a nice winner,” Mr Forbes-Wilson explains.