Relative performance and a desire for more concentrated exposure to sectors such as pharmaceuticals have prompted WH Ireland’s investment team to replace Adrian Frost’s Artemis Income with the Threadneedle UK Equity Income fund.
The team, which runs a range of risk-rated portfolios, made the switch earlier this year in an effort to access the UK equity sectors they judged to be more attractive.
“It’s going to get difficult for [certain consumer goods] stocks like Reckitt Benckiser but pharma and tobacco can do well. Retailers [also] look cheap,” said John Goodall, the firm’s head of private client research.
“With pharma there’s more value in there in terms of cash flow and dividends. Other funds might be going for utilities where valuations look stretched and dividends unsustainable.”
The team views the £3.8bn Columbia Threadneedle fund, run by Richard Colwell, as a source of concentrated exposure to some of these favoured sectors. At the end of April the fund had 6.3 per cent in AstraZeneca and 6 per cent in GlaxoSmithKline.
“It has more focus than the other funds,” he added.
Performance considerations have also played a role. Over three years Artemis Income has returned 27.2 per cent, compared with 31.9 per cent from the Threadneedle fund and 25.2 per cent from the average IA UK Equity Income member.
“It still just about outperformed [peers] but we thought it’s not quite as good as Threadneedle,” he said.
More broadly, Mr Goodall shares some asset allocators' trepidation about valuations in equity markets, particularly in the UK and US. As a result the team has continued to back cautious managers.
These include Miton’s Gervais Williams, whose UK Smaller Companies fund the team continues to hold despite a bout of underperformance. Over three years the vehicle has returned 22.5 per cent, compared with 38.5 per cent from the IA UK Smaller Companies peer group average, according to FE Analytics.
“Gervais Williams’ funds have underperformed in the short to medium term but we have still got confidence the long-term approach will pay off,” said Mr Goodall. “He has got a cautious approach.”
Other funds with a defensive bent, including BNY Mellon US Equity Income, have entered the portfolios in recent months.
“We have still got a fairly cautious approach to where valuations are,” said Mr Goodall. “That [fund] should give us a value approach if we see the market come back.”
In fixed income, the team has continued to back corporate bond funds from the likes of M&G and Invesco Perpetual, as well as the Baillie Gifford High Yield portfolio.
The team also recently added index-linked bond exposure to the range, only to trim most of this back.
“We thought inflation was quite close to the peak. Because of the movement in oil, it’s likely that the move in inflation will be downwards," said Mr Goodall.
The team has some exposure to longer-duration instruments, via use of the Newton International Bond fund. Mr Goodall suggested bonds with higher duration could stand to benefit from a pullback in equity markets.