Income fears prompt de Tusch-Lec shift

Artemis’s Jacob de Tusch-Lec has been selling down defensive high-yielding stocks and buying more growth companies as he fears for the future of traditional equity income stocks.

The Artemis Global Income fund has shot to the top of the IMA Global Equity Income sector due, in part, to Mr de Tusch-Lec buying into high-yielding sectors such as real estate investment trusts (Reits) when investors flocked to them in search of yield.

However, the manager says that now rates are expected to rise, equity income funds may need to find another way to generate returns.

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He said: “In a world where government bond yields are at 4 per cent, equity income comes under pressure and you have to ask how you run a fund in that environment.

“It will be difficult because suddenly a number of dividend yields do not seem that high and suddenly a lot of companies’ investments do not make the same return on capital.

“High interest rates could be the moment where global income needs to have a bit of a rethink: you don’t want to be stuck in Reits; you don’t want to be stuck in bond proxies.”

He said “the time frame is very uncertain” for when government bond yields, particularly in the US, would rise, but he said the “direction of travel is clear” in that yields must inevitably rise.

So in anticipation of the move higher in government bond yields, Mr de Tusch-Lec said he was moving early to reduce his weighting in high-yielding stocks such as telecoms, utilities and Reits from 20 per cent of the fund to 10 per cent.

The manager said he wanted to get more stocks with potential “dividend growth” into the portfolio instead and that he was buying more growth-orientated firms, sacrificing the initial yield for a better total return.

The Artemis Global Income fund is the top-performing fund in the IMA Global Equity Income sector in the past year, generating a return of 30.1 per cent compared with the sector average of 19.2 per cent, according to data from FE Analytics. The fund is also second best in the sector in the past three years.

Mr de Tusch-Lec said the flexibility he has on the fund has served him well in the past three years as it allowed him to move into different investment themes during the “violent rotations” in the markets.

He claimed equity income funds that did not have the same flexibility may become trapped in bond proxies if they sell off as interest rates rise.

However, Mr de Tusch-Lec admitted he had made a mistake by holding on to his exposure to leveraged Reits for too long following their bull run at the start of the year.

He suffered in May this year when the stocks fell on the prospect of a reduction in US quantitative easing and it took him a couple of weeks to realise that “the trade was done” and to sell out.