UK equity manager James Illsley has continued to back selected ‘bond proxy’ stocks despite believing many equities with these attributes are expensive and vulnerable to inflation.
Mr Illsley, co-manager on the £227m JPM UK Equity Core fund, is among a number of investors who remain wary of defensive stocks with bond-like attributes.
“We tend to be underweight some of the more expensive defensive areas like bond proxies,” he said. “People get used to that new paradigm, where they are happy to pay 20 times [earnings] for a consumer goods name. You can see inflationary pressures building.”
However, Mr Illsley has still backed some companies such as Diageo, where he believed restructuring was beginning to pay off.
“We look at Diageo and it has invested a lot in its scotch division, rebuilt its inventory and had a period of improvement. It’s not that expensive. We are seeing earnings momentum coming back through,” he said.
The manager, who had a 3.7 per cent position in GlaxoSmithKline at the end of February, said “selected pharmaceuticals” were among those bond proxies with attractive characteristics.
Mr Illsley, who runs the fund with Christopher Llewelyn and John O’Brien, has avoided the major macroeconomic plays while looking to keep sector risk “quite tight and quite low”.
As part of the latter approach, the team has taken a selective approach with various industries. In financials, which represented 25 per cent of assets at the end of February, this has involved backing challenger banks while limiting exposure to traditional players like RBS.
“We are overweight the challenger banks like Aldermore, Shawbrook and One Savings Bank,” said Mr Illsley. “These banks don’t have the legacy issues of some majorbanks.”
The team, which has a slight bias towards cyclicals, is wary of gold stocks, which Mr Illsley viewed as expensive. But managers are backing miners such as Anglo American and Rio Tinto. “Rio is degearing very rapidly and reducing capital expenditure,” he said.
Such mining exposure has helped the fund along in recent months. In what has been a difficult period for relative returns from active UK equity funds, the JPMorgan vehicle has outperformed peers. The fund has also performed well on a three-year basis, returning 25 per cent versus a 22.7 per cent average from its IA UK All Companies peer group and 21.9 per cent from its FTSE All-Share benchmark.
‘Benchmark plus’ equity funds have come under scrutiny amid demand for higher alpha to justify excess charges over passive funds. Notably, BlackRock opted to move away from offering core equity solutions in its US-domiciled range earlier this year, putting greater onus on the use of algorithms instead of stockpickers.
Despite such developments, Mr Illsley claimed the fund remained relevant to buyers.
“There are fund managers out there who have track records from focused portfolios – with UK Equity Core we wanted to offer something different,” he said. “This is for clients to have a fund in their portfolio for the longer term to add some higher octane to, to have a core and satellite approach.”
