Further monetary stimulus in the US and Mario Draghi’s bond-buying programme have done nothing to address the biggest problems facing markets, according to Newton fund manager Tineke Frikkee
, who believes the recent surge in equities is unjustified.
Market sentiment has picked up significantly since last week’s announcement of QE3, sending the FTSE 100 to a six-month high of 5,915 earlier this week.
According to the latest FE Trustnet
poll, almost half of investors have increased risk
on the back of these developments in the US and Europe.
However Frikkee, who heads up the £2.27bn Newton Higher Income
portfolio, thinks the market has rallied on false pretences.
"Nothing has changed as far as I’m concerned," she said. "In September everyone has got excited which has pushed prices up, but if you look at the fundamentals, what has changed?"
"The FTSE’s 3.5 per cent yield is hardly high on a long-term basis. The majority of companies we’ve spoken to are very cautious."
"Typically, earnings forecasts are downgraded in September, but we already saw a number in August, and more have followed. These seemed to have been ignored for some reason."
Frikkee says one of Newton’s biggest investment themes is coping with the deleveraging environment – a problem that has yet to be addressed in her opinion.
"QE doesn’t fundamentally change anything – apart from increasing the levels of debt [in the western world]," she continued. "The debt levels in the UK are little changed and they haven’t even started in the US."
"As long as there is low growth and debt remains high, we’d rather tread the steady path."
As a result, Frikkee has upped her cash weighting to just shy of 7 per cent and has reduced her number of holdings.
"There are two ways to deal with a highly volatile market like we’re experiencing now," she explained. "You can either try and time the market perfectly and attempt to sell at the top and buy at the bottom again and again and again, but everyone knows just how difficult this is."
"This is not our style – we think it’s more effective to invest in high-yielding defensive companies that make some money in bull markets, but lose less on the downside."
In Frikkee’s view, outperforming in down markets is more important than outperforming in up markets – something that the majority of our readers agree with.
In a recent FE Trustnet
poll, 72 per cent of 672 respondents said they would rather their fund protects against the downside than shoots the lights out during a market rally.
"It’s a question of mathematics – if you lose 20 per cent one year, you have to make more than 20 per cent the next year to break even," she explained.
"There’s also the issue of trading costs when you’re trying to time the market."
In the current low-growth deleveraging environment, Frikkee prefers companies that aren’t as reliant on consumer demand.
"We like sectors where there is always a strong demand for products, such as pharmaceuticals, utilities, tobacco and telecoms," she continued.
"Of course these sectors aren’t completely immune, as people may choose to use less water when times are hard, but they are less reliant [on economic performance]."
The Newton High Income portfolio has 13.1 per cent in healthcare and 11.4 per cent in utilities – both significant overweight positions. GlaxoSmithKline, British American Tobacco (BAT) and Vodafone are among Frikkee’s biggest holdings.
The fund has had a disappointing time in recent years, marginally underperforming its IMA UK Equity Income sector and FTSE All Share benchmark over three- and five-year periods – albeit with less volatility.
Performance of fund vs sector and index over 3-yrs
Source: FE Analytics
Frikkee says the fund’s high yield was partly responsible for this difficult period. Last year, its one-year historic yield peaked at 8 per cent, but around 12 months ago the Newton team pledged to bring this figure down.
The fund’s yield is now 5.5 per cent, at a level that Frikkee is far more comfortable with.
"A year ago we said we wanted to bring the yield down by 20-25 per cent, and it is down by 24 per cent, so we’re happy," she said.
"The yield is still top quartile in the sector, and all in all our clients are happy with the result."
"Most of what we make comes from our yield, but we’re also looking for companies with some potential for earnings growth. We always ask ourselves 'do we have the flexibility to buy and sell what we want?' and we now believe we do."
"We’re happy and comfortable that we can maintain this level," she added.
The Newton Higher Income fund is available with a total expense ratio (TER) of 1.61 per cent and a minimum investment of £1,000. Frikkee has headed up the portfolio since April 2004.