‘Sideways’ market will be healthy: Chris Murphy

The UK stockmarket would benefit from a short period of “sideways” or even downwards trajectory, according to Aviva Investors’ UK Equity Income fund manager Chris Murphy.

The FTSE All-Share index has enjoyed a strong run since the bottom of the market in March 2009, having more than doubled in value since then.

But as confidence has grown in the economic recovery in the UK and other developed markets, share prices have risen faster than company earnings in many cases, leading some managers to take cautious stances. Last month Jupiter’s Steve Davies told Investment Adviser he had built up almost five times his normal level of cash to protect against volatility in the weeks ahead.

Mr Murphy, who has just passed five years in charge of the £971m Aviva Investors UK Equity Income fund, said: “It would be quite healthy for equity markets to go sideways or down a little.

“We have seen froth in the FTSE 250 index, and with the number of IPOs there is too much hot money. I’m happy for things to drift down.”

So far this year the FTSE All-Share index – the UK Equity Income fund’s benchmark – has risen 1.9 per cent, but it has been volatile: the index fell 3 per cent in January before gaining 5 per cent in February.

The FTSE 250 index of medium-sized companies has gained just 0.3 per cent so far this year, after a 32.3 per cent rise during the course of 2013.

In March Mr Murphy’s portfolio was hit by the sell-off in insurance companies, following the overhaul of annuity rules in the Budget, as he held stakes in both Legal & General (L&G) and Resolution.

Resolution – the majority of which is made up of legacy annuity business – saw its share price collapse by almost 16 per cent on March 19 after chancellor George Osborne’s announcement. L&G’s share price fell 8.6 per cent on the same day.

Mr Murphy said: “The world of annuities and retirement income will change – it’s not going to happen overnight but shares will be rerated in time.

“A lot has been made of the impact on Resolution; far more than should have been. However, it is yielding more than 7 per cent [and] that’s why we are looking to buy. Overnight in March it may have become cheaper but the back books it has could create opportunities.”

Elsewhere in his portfolio, Mr Murphy had high-conviction holdings in mining giants Rio Tinto and BHP Billiton at the end of March. A growing number of income managers are backing miners to end a long period of underperformance. The manager said he had become more positive about the sector after meeting the new chief executives of several mining firms.

Since Mr Murphy took charge of the Aviva Investors UK Equity Income fund in April 2009 it has gained 115.1 per cent, compared with the FTSE All-Share index’s 105.7 per cent rise. According to the fund’s latest factsheet its historic yield was 3.5 per cent at the end of March this year.