Mark Dampier: Success of unloved ITV is no mystery to clever investors
Friday 05 April 2013
The current investment climate is very much against the saver. Financial repression is everywhere. Like me, many of you might have been disappointed recently to receive notice that your savings accounts' interest rates are falling further, to around 1.5 per cent gross.
I see no end to this given the state of the UK and European economies. I certainly don't see any chance of interest rates rising before the general election in 2015 and probably for some time after.
This presents a conundrum for savers. With inflation around 3 per cent cash is losing its real purchasing power. This might not be significant over a year, but over three or four years it will become highly noticeable.
I am not suggesting investors shouldn't keep some cash. Everyone needs money for a rainy day. However, the days of getting a real return on cash deposits have gone, at least for the foreseeable future. The problem is that to get a better return you need to take risk. This is exactly what the Government wants you to do - either invest in financial assets or spend money to boost the economy.
Providing enough cash is put aside for emergencies, one investment worthy of consideration is UK equity income. This is a subject I keep returning to, as in my view it is a type of investing that stands the test of time.
One UK income fund that is often overlooked is Threadneedle UK Equity Alpha Income. At £359m the fund is surprisingly small considering the records of Leigh Harrison and Richard Colwell, the fund's co-managers. They also run the £1.6bn Threadneedle UK Equity Income fund, but I prefer the Alpha fund, which tends to take a little more risk, placing greater conviction in a more concentrated portfolio of stocks.
Mr Harrison and Mr Colwell believe we remain in the midst of a prolonged recovery from the financial crisis. They expect sub-par economic growth to continue. As a result they are maintaining a balance between solid, reliable companies able to pay consistent dividends and those able to grow regardless of the prospects for the wider UK economy.
The duo are essentially looking for unloved companies which have been misunderstood by other investors. In the case of ITV, for example, many investors were concerned about falling advertising revenues, but Leigh Harrison and Richard Colwell believe the value of its content outweighs this. They also look for companies where change is having a positive effect. 3i, for example, was paying an attractive yield, but a restructuring following the appointment of a new CEO also helped to push the share price considerably higher.
Elsewhere, Mr Harrison and Mr Colwell have generally been avoiding banks and mining companies, which they do not view as quality businesses. Portfolio activity was limited in 2012 with only a few stocks purchased, including F&C, the asset manager; National Grid; 3i; and Close Brothers.
The size of the fund means that they are able to invest more in medium-sized companies. Presently, the fund has approximately 25 per cent invested in higher-yielding mid-sized companies. If I was going to be critical of the fund, though, I would suggest that it could be further differentiated from peers by investing more in this area. The likes of Neil Woodford at Invesco Perpetual, for example, simply can't get much exposure to medium-sized companies, even if he wanted to. I believe Mr Harrison and Mr Colwell should use the smaller size of this fund to greater effect.
That said, the fund had a good 2012, continuing to outperform in the second half of the year, where many funds with a greater bias towards larger companies with defensive characteristics faltered. The strong performance was achieved despite not owning any banks, which had a strong run over this period.
The portfolio currently yields 4.5 per cent, and those investing through an Isa or Sipp have no further tax to pay. Clearly dividends cannot be guaranteed, but as we have seen nor can high interest rates on cash deposits. Perhaps savers who have excess money in cash deposits and who are willing to take on some risk with their capital should consider a fund such as Threadneedle UK Equity Alpha Income. It at least has some chance of offering inflation-beating returns, and at present offers considerably higher income than cash deposits.
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.hl.co.uk/independent
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