Henderson Global Investors’ James Henderson (pictured) says UK markets are well placed to continue their upward swing, even if the underlying economy faces more severe headwinds in the future.

The FE Alpha Manager says the current rally is sustainable and that investors should be turning to equities not just for growth, but for income as well.

"The lessons of 2008 haven’t been forgotten," he said. "You usually get a market correction when companies are over-investing and that’s not happening now."

"Companies are well positioned for shakes in the global economy. There is a good base for good returns going forward, even in an anaemic economy."

"Many smaller companies have net cash on their balance sheets, and that’s a good investment background."

Henderson says many UK companies are achieving underlying earnings growth of 5 to 10 per cent with very little growth in the wider economy, a sign he says is very encouraging.

He typically has an equal weighting in his £389.7m, four crown-rated Henderson UK Equity Income fund to large, medium and smaller companies.

Henderson says the fund is currently dominated by large cap holdings, with slightly more than a third in the biggest names in the UK market.

Blue chips such as GlaxoSmithKline and BP feature in the fund’s top-10 holdings, but more niche names such as FTSE 250 insurer Hiscox and mid cap chemicals company Elementis are also among his highest-conviction plays.

The UK Equity Income portfolio has outperformed both the IMA UK Equity Income sector and the FTSE All Share over one, three, five and 10 years.

The fund’s greatest outperformance came over the last three years, when it made 65.32 per cent.

The sector picked up 35.19 per cent over this time, while the index gained 32.28 per cent.

Performance of fund vs sector and index over 3yrs



Source: FE Analytics

The manager says his ability to move between large and small caps has boosted the overall returns of the portfolio.

"You get better returns from smaller companies than others but it’s never been very consistent," he said. "If you’re fishing in a pond that’s bigger, you’re more likely to get bigger returns."

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However, the exposure to more stable, larger companies has added a layer of income stability in the portfolio.

Henderson says equity valuations are not always attractive and that when smaller companies get too expensive, he tends to take profits from his winners and scale back exposure to that end of the market cap spectrum.

"When valuations aren’t attractive in smaller companies, I tend to reduce and go back in when valuations are more attractive," he said.

"It’s a very simple thing, investing. It’s just not an easy thing," Henderson said.

While part of Henderson’s equity income remit focuses on providing a steady, reliable and growing income to his investors, he says he is looking for stocks with the ability to grow their dividend rather that just the steady blue chips that continue to pay out but will not boost their dividend over the medium- to long-term.

The fund is currently yielding 3.2 per cent, one of the lowest figures in the sector.

Henderson says the key to a sustainable income over the long-term is finding growth stocks.

"You have to be growing as a company in order to provide real income growth," he said.

"It’s about dividend growth, that’s the way to get a sustainable income. You can put stuff in the shop window by buying high yield, but that’s not sustainable."

"I’m always looking for growth, otherwise you’re usually ending up in a value trap," Henderson added.

The manager says that while telecommunications stocks currently look cheap, they are a value trap because the sector is too competitive and there is not enough capacity to get the desired growth he is looking for.

Instead, he favours industrial and technology stocks.

"They usually have some sort of technical edge that makes them competitive," he said. "We’re also seeing margin expansion in industrials."

Henderson tipped UK-based automotive and aerospace components company GKN as one of his top growth and income plays for 2013.

The FTSE 100 engineering company has seen stellar performance over the last 10 years, returning 306.77 per cent while the index has gained 152.95 per cent.

The stock was hit hard in 2008, when it shed a painful 62.94 per cent, compared with a 28.33 per cent loss from the index. However, it has regained 312.86 per cent since the start of 2009.

"The margin could go quite a bit further up," Henderson said.

The manager has consistently outperformed his peer group over one, three, five and 10 years.

Over the last decade, he has made 250.41 per cent, while his peer group has only picked up 207.35 per cent, according to FE Analytics.

Performance of manager vs peers over 10yrs



Source: FE Analytics

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The manager heads up four portfolios at Henderson – his flagship Henderson UK Equity Income fund and three investment trusts, including the long-running Lowland Investment Company.

The UK Equity Income fund requires a minimum investment of £1,000 and carries a total expense ratio (TER) of 1.75 per cent.