If there is one fund that has frustrated me over the last few years it is PSigma Income. Managed by one of the most experienced income managers I know, Bill Mott, its performance since launch in April 2007 has been poor and the fund has fallen 5 per cent.
A large part of this has been timing. The FTSE 100 is down around 12 per cent over the same period, though with dividends reinvested the index is up 8 per cent. Mr Mott has also paid the price of purchasing bank shares in the initial months, and even though he quickly reversed his decision their falls still hurt performance. Yet even allowing for these problems the fund has still been below par, apart from in 2011 which was a good year for the fund.
I recently caught up with Mr Mott to examine performance over the previous quarter. His fund generally contains steady, defensive, blue-chip companies, so it wouldn't be expected to perform well in relative terms when the market rises strongly. Indeed, the third quarter was a classic "risk on" period with further quantitative easing (QE) announced. A major component of the fund, the pharmaceuticals sector, was particularly disappointing. Both GlaxoSmithKline and AstraZeneca failed to find favour with the market.
Mr Mott does appreciate that QE-induced "risk on" periods affect his relative performance, even if his prognosis for weak economic growth is proved correct. To counter this, some of the portfolio is dedicated to areas that could be expected to do well if inflation rises due to QE, such as the oil and gas sector. He prefers these to miners because spending on energy tends to be less discretionary.
To this end he has around 6 per cent of the fund in Royal Dutch Shell, 5 per cent in BP and 3 per cent in BG Group. The latter suffered an 18 per cent fall following results at the end of October with news of project delays. A relatively poor showing from oil shares as well as the effective profit warning from BG has not helped the fund. In addition, a 2 per cent weighting in gold shares (the first time that he has held them in his career) has performed badly, falling 10 per cent in the last month – even though the gold price has actually been holding up very well.
When considering more cyclical companies, Bill Mott looks at the attitude of management. He likes to see a focus on delivering cash to shareholders. One example is building supplier Travis Perkins. The firm dominates its field, and despite being subject to the economic cycle it consistently generates cash for investors. However, there are relatively few cyclical firms that meet his criteria, hence the concentration in the oil and gas sector.
What has been particularly frustrating is that Mr Mott's views on the UK economy are in tune with my own: a weak, stuttering performance delivering sub-trend growth, more likely to be around 1.5 per cent than the 3 per cent-plus we were used to prior to 2007. The Bank of England has recently finally revised their expectations to those expressed by Mr Mott several years ago!
Where he has positioned the fund, in companies with good visibility of earnings, therefore seems the best place to be. Unfortunately, it seems individual stock selection has, on the whole, let him down.
Recently there has been a view that defensive sectors have become expensive with companies such as Nestlé on a price-to-earnings ratio of 16. Yet in an uncertain world stable businesses like Nestlé with good emerging market growth and an excellent potential for increasing dividends should arguably be on a higher rating.
If such defensives do rally further the fund should fare well, though the risk is it continues to be left behind during "risk on" periods dominated by more cyclical areas where Mr Mott isn't invested.
Undoubtedly the last five years have been testing for fund managers. Mr Mott may have called the macroeconomic environment right, but without good stock selection to go with it he has lost ground to his rivals.
Neil Woodford has had a similar economic outlook and has performed much better. Though Mr Mott's record prior to his return to fund management with PSigma was exemplary he now needs to deliver for investors.