Mark Dampier: Spanish woes mean Hambro income can take advantage
Saturday 28 July 2012
As I write stock markets are falling once again to the tune of the eurozone crisis. This time the spotlight is not on Greece, but Spain. The grim economic news is making the challenge of investing difficult. There is plenty of negativity pulling stock markets down and I have sympathy with those concerned about timing their investments.
Yet as a long-term investor, a term which Professor John Kaye has been using this week, stock market falls should be seen as buying opportunities. Those looking for income should certainly rejoice. Falling share prices mean rising yields. A share trading at 100p which pays a 5p dividend yields 5 per cent. If the share price falls to 90p the yield jumps to 5.5 per cent. Buying at this point "locks in" the higher yield. This is because an investor buying at 90p will always earn a 5.5 per cent yield no matter what happens to the share price, assuming the dividend per share remains constant.
One fund which crops up on my radar at times like this is the JO Hambro UK Equity Income Fund. It currently yields 5.3 per cent and has a superb record, having grown by 81 per cent since launch in November 2004, compared with 63 per cent for the FTSE All Share, with dividends reinvested. Clive Beagles and James Lowen, the fund's managers, currently have a bias towards companies more sensitive to economic growth.
They also have approximately 42 per cent of the portfolio invested in higher-risk smaller and medium-sized companies. This means the portfolio looks quite different when compared with many competitors. It is also likely to result in greater volatility, particularly when investors are nervous, as they are now. Caution needs to prevail in the short term, but this is the type of fund to look at when markets begin to turn.
I don't mean to suggest this fund is risky in terms of the shares it buys. Mr Beagles and Mr Lowen do considerable work reviewing balance sheets, making sure they are robust enough to survive difficult economic times. Presently, they don't believe companies with lower levels of debt are being rewarded relative to those with a lot of debt. They point out Centrica has a fraction of the debt of SSE, but this is not being factored into valuations. They hold Centrica, but not SSE, for this reason. The managers do hold some stocks with defensive characteristics that can be more resilient when the outlook for the economy is bleak.
GlaxoSmithKline and Royal Dutch Shell are examples as both provide goods and services consumers are less able to cut back on. However, they remain cautions on many defensive companies, believing some are priced for perfection and any setback could see them disappoint. They also see little growth potential among tobacco companies, so are avoiding companies such as British American Tobacco.
Elsewhere, they are not keen on banks as they think they will continue to retrench; restricting lending and repairing balance sheets. There are exceptions though and they hold Close Brothers, who have been increasing lending by 20 per cent a year for the past three years. 3i is another company they have invested in. It lost control of costs after 2007, but the new CEO has taken quick and decisive action, reducing costs by 30 per cent after cutting the headcount, closing two offices in China and refinancing debt. In addition, the CEO has invested £7 million of his own money into the company's shares. Now that is putting your money where your mouth is!
This fund is just over £1 billion in size (please note the fund does carry a performance fee), but remains nimble and flexible enough to take positions in the smaller and medium-sized company arena. In my view fund managers have plenty of scope to add value from this area of the market over the long term. I believe this fund complements the arguably better-known UK equity income funds run by Neil Woodford of Invesco Perpetual or Adrian Frost and Adrian Gosden's Artemis Income Fund. This is exactly why it forms part of my own portfolio.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial advisor and stockbroker. For more details about the funds included in this column, visit www.h.l.co.uk/independent
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