Despatches  

GAM’s Gosden is backing banks for UK income

GAM’s Gosden is backing banks for UK income

The likelihood of higher interest rates and bond yields will be negative for many traditional UK equity income shares but boost financial services companies, according to Adrian Gosden, who runs the UK Equity Income fund at GAM.

Gosden’s product is ranked 9th from 81 funds in the IA UK Equity Income sector over the three years to January 7. 

Gosden said he expected the bulk of the gains for income investors to come from share buybacks, rather than dividends, in 2022, as a result of companies having surplus cash.

This could mean, he said, dividend growth this year looks relatively muted compared with 2021, which was itself a buoyant year compared with the pandemic-induced dividend cuts of 2020.

But one area where Gosden did see a particular opportunity is financial services companies. Banks and insurers are required to hold a significant portion of their assets in bonds, and as yields rise, so do the profits from these holdings. 

Gosden said: “The 2022 outlook for UK equities will be more muted than in 2021 because the emergence of dividends and corporate activity won't be 'new' news to investors.

"The theme that will grab attention is the emergence of strong share buybacks in the UK. Starting in larger companies to begin with, we believe this will filter down through the market-cap scale.

"Companies now have enough cash to invest in their businesses and to pay dividends, but they have excess capital which allows them to buy back their own shares, and that's incredibly positive if they trade at the low valuations that many UK shares do.

"The biggest opportunity in the UK market in our view relates to the emergence of a yield curve and the threat of interest rates going up. Very simplistically, if the yield curve is rising, then financial services companies are much better to own because they could generate better profits.

"By contrast, very stable, well understood companies have risen to extreme valuations. They're less attractive to have in your portfolio, if that is the case, because their valuations are already present. The opportunity to produce alpha is going to depend on how that yield curve changes throughout the year and investors’ ability is to deploy capital into the right areas.”

david.thorpe@ft.com