Mark Dampier: A three-pronged plan that will reap rewards

The PSigma Income run by Bill Mott is a fund I have highlighted in this column before. Mr Mott is one of the most experienced fund managers in the industry, and I have always valued his ability to read the economic climate, as well as his stock-picking skills.

To be honest the fund didn't get off to a good start when it launched in April 2007. Like many, he misread the banking situation – a most unusual mistake by him but one he quickly corrected. The more recent performance has seen the fund rising up the league tables within its sector, and I remain confident it will be one of the best performing income funds in the years to come.

I caught up with Mr Mott recently, and he is presently looking at three main themes for the fund. First, a "drought" in yield, which means the poor level of income on offer from assets generally, and from cash in particular. He feels shares with yields exceeding those on gilts will be in demand and perform well. He has therefore positioned the fund towards the traditionally defensive areas of the market such as pharmaceuticals companies AstraZeneca and GlaxoSmithKline, as well as telecoms such as Vodafone and Cable & Wireless.

His second theme is the long-term weakness of the pound. He believes he can take advantage of this by buying overseas companies, as well as UK companies that earn much of their revenue abroad. Although this is a UK fund some international holdings are allowed, and he has taken positions in high-yielding European telecoms stocks Deutsche Telekom (yielding 7.7 per cent) and Telefonica (yielding 5.1 per cent).

In pharmaceuticals he holds the US firm Pfizer (yielding 4 per cent) and Sanofi-Aventis (yielding 3.9 per cent). In utilities he owns E.ON and GDF Suez. Mr Mott is also a fan of emerging markets where he foresees a growing middle-class and higher consumer spending. To benefit from growth in these regions he doesn't need to buy emerging market shares or funds. By buying companies such as Unilever, Diageo, Nestle, Johnson & Johnson, Coca Cola and Colgate Palmolive (all of whom derive a large proportion of their earnings from emerging markets) he can get exposure via the developed world.

The third theme is that the UK economy will disappoint going forwards, and the select band of companies able to grow in this environment will be highly prized by investors. He sees a return of the "nifty fifty" style of investing that was popular in the 1950s and 1960s, when a small number of companies thrived despite an anaemic economic background.

This time round Mr Mott believes certain companies, including Tesco, Serco and Arm Holdings, can exceed growth expectations and demand a premium rating.

It is clear that he does not believe we are going back to the favourable economic conditions we experienced prior to the credit crunch. This confirms my own view that the UK has built up huge economic imbalances and now needs to save more and spend less – the complete opposite of course to the present situation.

Following the exit of quantitative easing and the hike in VAT, we can expect further fiscal tightening after the election. Thus the outlook for growth is fairly poor and, as a consequence, interest rates shouldn't need to rise. This surely creates a positive environment for good quality equity income funds, which can find resilient companies capable of providing reliable and growing dividends.

I remain a fan of this fund and the equity income sector as a whole. To find a decent level of income investors will increasingly have to turn away from deposit accounts earning next to nothing and take more risk.

UK interest rates could easily remain between 0.5 per cent and 1.5 per cent for the next three to five years, so it does seem quite reasonable for companies that can grow their dividends to be re-rated by the market. In my view the fund remains very much a buy.

Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independent