Fidelity’s Clark keeps big guns in face of small cap success

Fidelity’s Michael Clark has added a holding in oil giant BP to his £722m Fidelity MoneyBuilder Dividend fund as he retains a focus on large caps in the face of outperformance by smaller companies.

While the market was led by small and mid caps in 2013 – as demonstrated by the outperformance of income funds from Unicorn and Chelverton – Mr Clark said there were still large-cap stocks available delivering dividend yields in the region of 5 per cent.

The manager cited BP, rival Royal Dutch Shell and British American Tobacco as examples of the dividend “stalwarts” that he is backing to deliver share price growth as well as rising payouts to investors.

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“These are well supported dividends, and this is where the value is in the market today, certainly for my strategy,” Mr Clark said.

“If the financial crisis had any benefits, it was that companies started to value cash, they deleveraged and cleaned up their balance sheets and they are mostly in much better shape now.

“The value here is very obvious. In 2006-07, the companies with the highest yields were the ones that failed to pay when the crisis hit. Back then, I used to spend a lot of time worrying about who was going to cut their dividend.”

In spite of several UK equity managers eyeing up Lloyds Banking Group as the government prepares to offload more of its stake in the bank, the manager said he was avoiding the stock. He argued that Lloyds’ role in the payment protection insurance scandal is likely to delay a return to dividend payouts.

Elsewhere in the portfolio – 70 per cent of which is dedicated to large caps – the manager hailed pharmaceutical firms as “companies with real pricing power”.

“These firms have a lot of flexibility and their margins are protected,” Mr Clark said. “GlaxoSmithKline has a very good yield, and there is potential for capital growth in this area, too.”

GlaxoSmithKline and AstraZeneca, which are the manager’s top two holdings in the fund, have enjoyed robust share price increases in the past 12 months of 14 per cent and 39 per cent respectively.

Elsewhere, the manager has backed “out of favour” areas such as supermarkets.

He said: “Supermarkets such as Morrisons offer very good yields, but the area overall is on the back foot at the moment, as competition is tough and consumers are still under pressure. The shares have come down, and although they do not make fantastic returns, they are incredibly robust businesses; the market can throw a lot at them.”

The Fidelity MoneyBuilder Dividend fund is up 14 per cent in 12 months, according to FE Analytics, against an IMA UK Equity Income sector average of 18 per cent. In five years, it is up 90 per cent against the peer group’s 103 per cent.