The top-performing manager of the group’s flagship £954.7m UK Equity Income fund said energy companies, banks and housebuilders were all key areas which could suffer from volatility brought about by political rhetoric in the coming months. Within his portfolio Mr Cholwill said he was actively avoiding such areas for that reason.
On the energy sector, he highlighted the need for companies to “be aware of the need to be seen to be investing in the UK”.
“Clearly energy companies’ profits are much higher than they were 10-20 years ago [but] politically it was not very astute of Centrica to be moving into the US while there is investment needed in the UK,” the manager said.
“Also SSE invested a lot of money in offshore windfarms but this is only affordable through government subsidies. It was also paying its dividend through debt so there is a question mark over the long-term sustainability of its dividend.”
Instead Mr Cholwill has bought into water companies because he said the sector had “got a degree of regulatory uncertainty out of the way”.
“The framework is tougher but manageable for water companies. They have been politically astute enough to reduce bills, and cut costs in order to invest. The energy sector hasn’t played that game at all.”
Mr Cholwill has also steered clear of Lloyds Banking Group and Royal Bank of Scotland, in spite of rumours that Lloyds would return to paying a dividend once the government had sold the stake it acquired in 2008 at the height of the financial crisis.
The manager said: “It is far too soon to buy Lloyds or RBS for the dividend.
“People are expecting Lloyds to pay a high percentage of profits out as dividends, but this ignores the political aspects.
“The government wants Lloyds and RBS to lend more to small and medium-sized enterprises. Leverage across European banks still looks high.”
In addition he cited the likelihood that Lloyds could be forced to accept more losses on bad loans in the years ahead as the bank’s cumulative loan loss provisions were “typically less than most US banks”.
Although housebuilders such as Bovis, Persimmon and Travis Perkins have all performed strongly in the past year, the companies do not make up part of Mr Cholwill’s 44 per cent weighting to mid-cap stocks because they have also benefited significantly from government stimulus aimed at boosting the housing market in general.
The manager said it was “entirely possible” that a future government could scrutinise the sector for failing to build enough houses.
Three of Martin Cholwill’s top picks safe from political interference
RLAM’s Martin Cholwill has bought into mining giant Rio Tinto. In its 2013 annual results, the company – which derives almost half of its gross revenue from its iron ore mining business – hiked its dividend by 15 per cent to $1.92 per share following cost cutting and a change in strategy. Chief executive Sam Walsh said the firm was committed to “improving performance, strengthening the balance sheet and delivering value for shareholders”.
The direct-to-consumer fund broker Hargreaves Lansdown has been in the financial trade press on an almost daily basis for months as it prepared to reveal first its post-RDR pricing structure and then the pricing deals it had struck with some fund management groups. In the second half of 2012 alone the company added 77,000 new clients and increased its assets under administration by 19 per cent. It also increased its dividend to 7p per share.
High street newsagent and bookstore WH Smith had been struggling to compete with the growth of online retailing which had hit some of its core business areas. But its stores in airports and train stations are now performing well: in a trading statement covering the Christmas period the group reported a 7 per cent fall in total sales from its high street stores but its travel-related stores saw sales increase 2 per cent.
