UKSep 30 2016

BlackRock Income eyes new ground

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BlackRock Income eyes new ground

The managers of the BlackRock UK Income fund have shifted their focus to sectors undergoing consolidation, in the belief remaining firms could put up stronger barriers to entry in order to fuel growth.

David Goldman, co-manager on the £356m fund, said a move into names in the packaging industry was an example of this strategy. 

He said the sector was undergoing the “consolidation process”, and that it was likely to see reduced competition.

“Provided you’re part of that consolidation process, we like that capacity in the industry is coming down, not growing. And yet the underlying demand trends seem to be pretty consistent in terms of needs from their customers,” Mr Goldman said. 

Similarly, he and co-managers Mark Wharrier and Adam Avigdori have avoided industries such as mining, where easy access to financing and cheap credit has resulted in overcapacity.

“There’s plenty of industries where capacity has gone through the roof,” he said.

“Mining is a classic example of that and we don’t own any miners. Our belief is that there’s just too much capacity still available, and while the new mines are coming in at lower cost to production, that destroys the returns for everyone else.

“It’s not just mining, there are other industries where we see that capacity [growing] and it makes us nervous.”

Cheap financing after the Bank of England’s post-referendum monetary easing measures also prompted the manager to reduce the fund’s allocation to financials from an overweight to an underweight position, as low interest rates make it difficult for banks to generate returns.

“We were not expecting a Leave result to the vote. That said we did have contingency plans in place – we had a clear idea of what we wanted to do in the event of a Leave or Remain [result],” Mr Goldman said. 

“We reduced our financials positions significantly. In a world where rates are going to be lower for longer, the path to normalisation has significantly changed.

“If you’re a financial company, that low-rate environment makes it harder to generate a decent return.”

UK income funds have faced challenges of their own in recent months. Although the Investment Association (IA) is undertaking a review of the requirements for funds in the sector after a number of vehicles were ousted for failing to meet yield targets, the manager is not concerned about the impact of change on his fund.

He maintained that the requirement for funds to achieve the 110 per cent of the FTSE All-Share yield target had not changed the way the strategy was run, despite the historically low-yielding environment.

While the rule may have forced some other fund managers to buy stocks simply on the basis of yield, Mr Goldman said that it was still beneficial for investors that managers have a goal to work towards.

“We have sympathy with the arguments that 110 [per cent] is a bit of an arbitrary number, but there’s an element of it that you don’t want to force the managers into owning things they don’t truly believe in, which the 110 rule might have done.”

But he added: “It’s worth remembering that the discipline of the 110 per cent rule to date has been a good thing, given the income sector in general has outperformed the wider [IA] All Companies sector.”

The BlackRock UK Income fund has delivered 32.2 per cent over three years, versus the IA UK Equity Income sector’s average return of 22.1 per cent over the same period, data from FE Analytics shows.