Chatfeild-Roberts wary of equity income bubble
The FE Alpha Manager says QE3 could exacerbate what is already beginning to become a problem and has the potential to push the biggest firms’ P/E ratios up to 50.
By Joshua Ausden, News Editor, FE Trustnet
Tuesday September 18, 2012
FE Alpha Manager John Chatfeild-Roberts
has joined a growing group of experts who believe there is risk of a bubble forming in equity income stocks.
Vast amounts of money have poured into dividend-paying companies in recent years, predominantly from investors searching for yield in the current low interest-rate environment.
Chatfeild-Roberts believes that the Fed’s recent QE3 announcement, which many expect to push up inflation in the US and beyond, could see even more money flow into the sector.
"It’s reasonable to suggest we’ll approach another ‘nifty 50’ situation, when companies such as Coca Cola went on to multiples of 50-times earnings [in the 1960s and 1970s]," he explained.
"Given the macro conditions, it’s perfectly possible to suggest that a lot more money will go into the sector."
When asked what this scenario would mean for the manager’s flagship Jupiter Merlin Income
portfolio – which holds Invesco Perpetual Income
, Invesco Perpetual High Income
, Artemis Income
and Jupiter Income
– Chatfeild-Roberts said: "If this were to be the case, we’d have to be flexible."
Steve Russell, who heads up the CF Ruffer Total Return fund, is another FE Alpha Manager who has recently voiced concerns over valuations in certain sectors of the equity income market.
He said in a recent interview with FE Trustnet
that continued quantitative easing could send inflation in the UK to high single-digit levels within the next decade, thus pushing a flood of money into already expensive dividend-paying firms.
Ruffer confirmed that last week’s QE3 announcement fits in with Russell’s outlook, but the group was unwilling to comment on the policy itself.
The CF Ruffer Total Return fund has 37 per cent of its assets in inflation-linked bonds, and Chatfeild-Roberts also confirmed the newly launched Jupiter Merlin Conservative portfolio
already holds inflation-linked bonds, and will up its exposure if his outlook for inflation changes.
Performance of manager vs peer group
Source: FE Analytics
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||3-yr returns (%)
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|Peer group composite
Chatfeild-Roberts is one of the best-performing multi-asset funds of the last decade, returning 153.25 per cent compared with 84.3 per cent from his peer group composite.
He currently co-manages the Jupiter Merlin range with fellow FE Alpha Managers Peter Lawery and Algy Smith-Maxwell.
All four of the multi-manager portfolios are four or five crown-rated, and top-quartile performers in their respective sectors since launch.
The manager is also wary about the outlook for China, and as a result has no direct exposure to the region.
"The Chinese really are slowing down, and we’re cautious about the outlook," he said.
"[Fellow Jupiter manager] Simon Somerville recently did some research on a Japanese company called Komatsu – a digger-maker in a similar mould to Caterpillar."
"The year to May 2011 saw sales to China fall by 30 per cent, which many just saw as a blip. However, in the last year this figure has fallen to 38 per cent."
"Hopefully there will be some kind of pick-up, but today the figures don’t look good."
Chatfeild-Roberts says he currently has the biggest bulk of his own money in the Jupiter Merlin Balanced fund, which sits in the IMA Mixed Investment 40-85% Shares sector.
"It’s got quite a lot in equities and has a decent yield, which I like," he continued.
The fund currently has around 68 per cent in equities and is yielding 2.1 per cent. Like all of the Merlin portfolios, it is available for a minimum investment of £500.
It has got a total expense ratio (TER) of 2.41 per cent.