Mark Dampier: The unloved today could be market darlings tomorrow


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The Independent Online

After a stellar run in 2013, smaller businesses underperformed their larger counterparts last year, frustrating the hopes of funds with a bias towards smaller companies.

By the usual standards of Clive Beagles and James Lowen, the performance of their JOHCM UK Equity Income Fund has been disappointing. Although the fund delivered a respectable return of 5.4 per cent over the past year, the IA UK Equity Income sector grew by 7.7 per cent and the FTSE All-Share Index by 7.2 per cent.

Mr Beagles pointed to the fund's bias towards smaller and medium-sized companies. He added that the biggest returns in the UK stock market were from "bond proxies" (sectors deemed "safe" enough to resemble bonds in terms of providing an income). These include consumer goods and utilities, which the fund has tended to avoid the past year.

Instead, it has focused on commodity-related businesses, which have struggled. The fund holds significant positions in both BP and Royal Dutch Shell. Both companies have been hit by the recent oil price fall, although Mr Beagles says that their performance has tended not to correlate significantly with movements in the oil price.

He views them more as defensive stocks with high yields, which helps buoy their share prices.

BP is in a good position, in Mr Beagles' view. The company was forced to take action after the Gulf of Mexico oil spill and has worked hard to cut costs. Many of its assets were sold near the top of the market, so it was already further ahead than its rivals.

Mining remains the most unpopular sector for most fund managers, though Mr Beagles believes the sector has moved from self-harm to self-help.

In his view, larger companies will benefit from cost-cutting and shareholder-oriented management, while low commodity prices drive out smaller competitors. The fund has increased its exposure, with holdings in Rio Tinto, BHP Billiton and Glencore.

Food retailing is another unfashionable area. The fund invests in Sainsbury's and the managers have been adding to the position. While they expect its dividend could be reduced by 20 per cent over the next two years, Mr Beagles believes this has already been factored into forecasts.

Despite investing in underperforming, out-of-favour sectors last year, the fund increased its dividend by 14 per cent – partly due to the merger of TUI AG and TUI Travel, another investment. And the managers have achieved annual dividend growth exceeding 10 per cent over the past five years.

In the near term, Mr Beagles expects companies in traditionally defensive sectors to stay overvalued, and funds could be affected by any rise in bond yields. The fund's contrarian stance sets it apart from most of its peers. I find it dovetails well with funds like Artemis Income and CF Woodford Equity Income, and complements many income portfolios.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds in this column, visit

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