The Analyst: Income funds are worth another look

It is a little over a year now since the launch of the PSigma Income Fund, which is managed by income guru Bill Mott. Nobody realised it at the time, but the launch coincided with one of the worst periods for UK high yielding shares since the late 1990s. Over the past year all the funds in the sector have made losses; it's just a question of how much.

Those with large weightings in financial stocks, and especially banks, are down the most as the credit crunch has started to bite. Those who avoided financials entirely are at the top. The difference between these two camps is broadly a loss of around 2 to 5 per cent or a loss of between 20 and 25 per cent.

Mott sits somewhere in the middle and for him, I guess, this will be a little disappointing. Given that he has had a fair amount invested in financials himself he has actually done relatively well. He has a fantastic record of investing in this sector so it is far too early to write him off.

I caught up with Mott recently in London, where I found him to be rather enjoying the challenge of investing in these markets. After all, they are the most interesting and hard to predict that we have seen for many years. He believes there are currently some echoes of both the tech problems in 2000 and the ERM debacle of 1992 – more of which later.

He believes there are three main scenarios for the short-term future of the market that seem credible. Firstly, a global recession where defensive sectors like pharmaceuticals, utilities and tobacco will thrive because they are relatively economically insensitive. He himself is slightly overweight in all these sectors except tobacco, where he is modestly underweight. Unfortunately there are not many hidden gems left.

The second scenario is the so-called "decoupling" view. This is that emerging markets will carry on doing well and offset the problems seen in the West. However, this is looking increasingly unlikely and the risk of disappointment is large if it proves to be unfounded. There are selected stocks that Mott believes represent good value, though. He holds Standard Chartered, Prudential and some of the global engineering companies that are benefiting from growth in emerging markets. One of the engineering firms is GKN, which as one of the smaller global players could well be a takeover target.

The third scenario is a realisation that domestic inflation isn't a problem in the UK; we could be seeing the start of this process now. The main things going up in price are food and fuel. The Bank of England simply cannot influence these things through interest rates, so in time they may feel like they can cut rates to start boosting the economy without fear of causing much additional inflation. Many stocks are currently being priced on the assumption that we will see a bad recession; they could bounce back strongly if the Bank of England start cutting rates. This is the view that I agree with most strongly myself.

In preparation for this third scenario taking place, Mott has taken positions in select stocks that he believes could be poised for a recovery. One is Kier Group, a construction and engineering firm that has been marked down alongside housebuilders, but has plenty of cash on its balance sheet to see it through any slowdown in business. Another favoured stock is Wolseley, which is being priced at a level that assumes business will be slow for ever – if sentiment lifts amongst investors its share price could rebound.

The PSigma Income Fund portfolio is widely spread simply because there are so many possible scenarios and outcomes. At present Mott holds 90 stocks with an underlying net yield of 4 per cent.

One of the principle reasons that income funds have generally struggled over the past year is that mining companies have risen so strongly. These firms typically pay very low dividends and as such are not an appropriate place for a true income manager to invest much of their fund. In this sense it is like the technology boom towards the end of the last century, so perhaps like then it will eventually look a blessing that income managers haven't been investing in this "hot" area.

At present the majority of private investors seem to prefer emerging markets and commodities instead of good, old-fashioned core income funds. Perhaps it is time to start redressing this balance and, in my opinion, the PSigma Income Fund would be an excellent place to begin.



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

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

News
peopleHowards' Way actress, and former mistress of Jeffrey Archer, was 60
Sport
Romelu Lukaku puts pen to paper
sport
News
Robyn Lawley
people
Arts and Entertainment
Unhappy days: Resistance spy turned Nobel prize winner Samuel Beckett
books
PROMOTED VIDEO
News
people
Life and Style
Troy Baker and Ashley Johnson voice the show’s heroes
gamingOnce stilted and melodramatic, Hollywood is giving acting in video games a makeover
News
i100
Life and Style
Phones will be able to monitor your health, from blood pressure to heart rate, and even book a doctor’s appointment for you
techCould our smartphones soon be diagnosing diseases via Health Kit and Google Fit?
News
people
Extras
indybest
Travel
Ryan taming: the Celtic Tiger carrier has been trying to improve its image
travelRyanair has turned on the 'charm offensive' but can we learn to love the cut-price carrier again?
Sport
Usain Bolt confirms he will run in both the heats and the finals of the men's relay at the Commonwealth Games
commonwealth games
Life and Style
Slim pickings: Spanx premium denim collection
fashionBillionaire founder of Spanx launches range of jeans that offers 'thigh-trimming construction'
News
Sabina Altynbekova has said she wants to be famous for playing volleyball, not her looks
people
News
i100
Life and Style
tech'World's first man-made leaves' could use photosynthesis to help astronauts breathe
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Senior Investment Accounting Change Manager

    £600 - £700 per day + competitive: Orgtel: Senior Investment Accounting Change...

    BA/PM,EMIR/Dodd-Frank,London,£450-650P/D

    £450 - £650 per day + competitive: Orgtel: My client, a leading bank, is curre...

    Senior Analyst - ALM Data - Banking - Halifax

    £350 - £400 per day + competitive: Orgtel: Senior Analyst, ALM Data, Halifax, ...

    Java developer - Banking - London - Up to £600/day

    £500 - £600 per day: Orgtel: Java developer - Banking - London - Up to £600/d...

    Day In a Page

    Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

    The day America’s love of backyard tigers led to a horrific bloodbath

    With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
    Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

    How Samuel Beckett became a French Resistance spy

    As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
    We will remember them: relatives still honour those who fought in the Great War

    We will remember them

    Relatives still honour those who fought in the Great War
    Star Wars Episode VII is being shot on film - and now Kodak is launching a last-ditch bid to keep celluloid alive

    Kodak's last-ditch bid to keep celluloid alive

    Director J J Abrams and a few digital refuseniks shoot movies on film. Simon Usborne wonders what the fuss is about
    Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

    Acting in video games gets a makeover

    David Crookes meets two of the genre's most popular voices
    Could our smartphones soon be diagnosing diseases via Health Kit and Google Fit?

    Could smartphones soon be diagnosing diseases?

    Health Kit and Google Fit have been described as "the beginning of a health revolution"
    Ryanair has turned on the 'charm offensive' but can we learn to love the cut-price carrier again?

    Can we learn to love Ryanair again?

    Four recent travellers give their verdicts on the carrier's improved customer service
    Billionaire founder of Spanx launches range of jeans that offers

    Spanx launches range of jeans

    The jeans come in two styles, multiple cuts and three washes and will go on sale in the UK in October
    10 best over-ear headphones

    Aural pleasure: 10 best over-ear headphones

    Listen to your favourite tracks with this selection, offering everything from lambskin earmuffs to stainless steel
    Commonwealth Games 2014: David Millar ready to serve up gold for his beloved Scotland in the end

    Commonwealth Games

    David Millar ready to serve up gold for his beloved Scotland in the end
    UCI Mountain Bike World Cup 2014: Downhill all the way to the top for the Atherton siblings

    UCI Mountain Bike World Cup

    Downhill all the way to the top for the Atherton siblings
    Save the tiger: The animals bred for bones on China’s tiger farms

    The animals bred for bones on China’s tiger farms

    The big cats kept in captivity to perform for paying audiences and then, when dead, their bodies used to fortify wine
    A former custard factory, a Midlands bog and a Leeds cemetery all included in top 50 hidden spots in the UK

    A former custard factory, a Midlands bog and a Leeds cemetery

    Introducing the top 50 hidden spots in Britain
    Ebola epidemic: Plagued by fear

    Ebola epidemic: Plagued by fear

    How a disease that has claimed fewer than 2,000 victims in its history has earned a place in the darkest corner of the public's imagination
    Chris Pratt: From 'Parks and Recreation' to 'Guardians of the Galaxy'

    From 'Parks and Recreation' to 'Guardians of the Galaxy'

    He was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star