The potential for takeovers of UK listed companies, combined with the presence of “consumer staples” and bank stocks, creates opportunities for investors whose priority is income even in a recession, according to several UK equity fund managers.
Job Curtis, runs the £2bn City of London investment trust, which has increased its dividend for each of the past 56 years and is underweight in the oil and mining sectors of the FTSE 100, though given how large a portion of the index those are, he does have investments there.
But in the current climate his preference is for income paying stocks which may be a bit more “recession proof”, in what he calls “consumer staple” stocks, which are businesses that sell products for demand that is relatively constant, even in tough economic times.
He cited Diageo, a drinks producer, the tobacco company British American Tobacco, Unilever, which makes soap and food, and the Swiss-listed Nestle, which produces, among other things, dog food as examples of companies or sectors that are resilient even in a recession.
Curtis said: “There is a lot of research to show that even in recessions, people don’t cut back on what they give their pets.”
He is also keen on the investment case for UK banks, saying higher interest rates improve their profitability, and that as a consequence of tighter regulatory regimes since the financial crisis, banks are more durable in the face of recession than has historically been the case.
This point is taken up by Ian Lance, who runs the £840mn Temple Bar investment trust, who said that while some banks have performed poorly of late, and many investors had written off the sector as a result, he believed that at current valuations levels, it was foolish to do this.
In terms of the resilience of the sector, Lance said: “It is worth rebutting the claims that even healthy, well-managed banks can be wiped out by bank runs - a topic front of minds in light of the recent SVB debacle.
"In the modern central banking system, in which most economies operate, this is simply not the case. To paraphrase the famous Lombard Street Maxim of Walter Bagehot, the function of central banks in times of crisis is to lend freely, against good collateral and at penalty interest rates.
"If you have intelligently managed your banking operation, and have sufficient quality on the asset side of your balance sheet, then you can borrow against these high quality assets in times of distress, and can afford to pay the penalty rates for doing so. A glance into the influx of deposits into the strongest banks over the past few weeks, in the wake of SVB, corroborates evidence that strong banks benefit at the expense of the weak.”
The other sector in which Curtis is keen right now is financial services, including wealth managers.
He had a stake in Brewin Dolphin, which was taken over by RBC last year, and retains a stake in Rathbones, the wealth management firm which recently announced a merger with Investec Wealth.
He is also a shareholder in Schroders and M&G, which has been a persistent subject of takeover speculation.
His rationale as an income investor for owning shares in this sector, is that he feels it is a secular growth story, with demand for financial advice and wealth management likely to grow in the UK over the longer term.
David.Thorpe@ft.com
