Chris Wright is preparing to sell out of mega-cap international earners from his £76m Premier Optimum Income fund as he closes an opportunistic short-term play only initiated at the start of the year.
The manager added Royal Dutch Shell, BP and HSBC in February after the market slump at the beginning of this year, but has suggested share prices may have peaked. Such stocks have performed well, particularly since the June 23 referendum and subsequent sterling slump. Excessive valuations have become a concern among both growth and income equity managers.
The short-term nature of the position is out of character for the fund, according to Mr Wright. The manager called the allocation to the businesses “unusual” – stock selection is normally focused on long-term growth and income, with such mega caps not conducive to his strategy.
“Unusually this year we went into three of the mega caps in quite a large way because they were big recovery situations. How long we’ll keep them is another matter, but they provide a certain yield,” he said.
“At the moment, the oil price seems to be drifting up, sterling is down, so on that basis BP and Shell are benefiting. Not from their doing, of course, the circumstances are in their favour. We run that until there’s an obvious change, collecting quite good dividends along the way. And, of course, because they’re paid in dollars they look better in sterling.”
An imminent move away from the mega-cap stocks reflects Mr Wright’s sentiment that too many investors have piled into “bond proxies” since the UK’s vote to leave the EU. He suggested the overcrowded space may create too great a downside risk.
“The big one at the moment, and the one I suspect most fund managers hate, is sterling. If you only had non-sterling assets you’d probably be doing very well. But it’s not even that simple because these bond proxies are starting to [turn].
“Those people who are outperforming at the moment have probably got very narrow portfolios. It will be quite fascinating to see how it all comes out over the next two to three months.”
The manger had reduced the fund’s holdings in housebuilders Berkeley Group and Bovis Homes to buy the mega-cap shares, but has considered buying back into them after they suffered in the wake of the EU referendum. He added that he had already taken another “nibble” at Bovis.
“House prices were getting less affordable and had performed very well. And when you’ve only got a set amount of capital, if you want to buy BP or Shell – and these are big animals – you have to sell something.”
Mr Wright said he has also considered adding to other domestic-focused UK stocks, such as IT services provider FDM and legal services company Gateley.
“We’re on the lookout for an opportunity to switch back into the smaller things that have been hit, the more interesting small- and mid-cap companies that have been hurt by circumstances.”