Defensive, dividend-paying stocks will continue to dominate the UK market for the foreseeable future, according to FE Alpha Manager Michael Clark (pictured), who thinks talk of a resurgence in cyclicals is overblown.

Research from Fidelity Worldwide Investment released today highlights that defensive stocks have come to dominate the FTSE 100 since the run on Northern Rock that started the UK’s financial crisis. 

These are less sensitive to the market and also have a better record of producing dividends, and despite the recent improvement in sentiment, Clark says he expects these shares to continue to outperform. 

"Given their relative outperformance, investors may start to question if defensive stocks are over-priced. Although many defensive stocks have re-rated relative to the market, compared to their own history I do not think this is the case," he said. 

"A key question for investors is whether the UK equity market can make headway given the macro backdrop. Companies less sensitive to the economy will continue to deliver decent returns, whereas more cyclical sectors are likely to struggle as it is clear that the global economy has slowed down." 

Half of the 10 biggest companies in the UK are defensives, Fidelity’s research shows, compared with just two prior to the bank’s collapse, while only one of the three banks in the top-10 remains. 

In contrast to Clark, some commentators are warning investors to be wary of the huge amounts of money going into the big defensive stocks and the funds that buy them.

Thomas Moore, manager of the Standard Life UK Smaller Companies Trust, told FE Trustnet last week that he believed the dividends in the big UK stocks were unsustainable and he was repositioning his equity income portfolio down the market cap scale. 

Clark, however, still prefers the large cap favourites. 

"Pharmaceutical stocks, for example, still offer excellent value in my opinion," he said.

"GlaxoSmithKline and AstraZeneca in particular are favourites. Glaxo’s share price is the same level as 15 years ago, yet earnings have doubled over that time. The stock yields more than 5 per cent with the prospect for decent dividend growth as well."

Clark took over the Fidelity Moneybuilder Dividend fund in August 2008 and data from FE Analytics shows it has outperformed its IMA UK Equity Income sector and FTSE All Share benchmark since then. 

Performance of fund vs sector since July 2008



Source: FE Analytics

Positions in GlaxoSmithKline and AstraZeneca make up 15.5 per cent of the fund’s holdings, while Clark has a further 10 per cent in Imperial Tobacco and BAT; the portfolio is currently yielding 4.46 per cent, above the sector average. 

Fidelity Enhanced Income was launched in February 2009 with Clark at the helm, and has already won a five crown-rating from FE. 

Its yield of 7.37 per cent is the third-highest figure in the sector.

Performance of fund vs sector over 3-yrs



Source: FE Analytics

In September 2007 HSBC, RBS and Barclays were all in the top-10 by market cap, while only the first now remains. 

Clark says there are considerable macroeconomic obstacles to the banks returning to the top ranks of the FTSE, and these hurdles will prevent them regaining their status as reliable dividend-payers.

He said: "My exposure to the banking sector is largely confined to HSBC. I think it is too early for an income investor to make serious investment in the broader banking sector at the moment."

"Of course, many of the banks are not currently paying a dividend, and this will remain the case for the next few years." 

"With continuing pressures on residential house prices, commercial property prices, and net interest margins from low interest rates, I feel that banks will struggle to return to a decent level of profitability for some time."