Equity markets have rallied around the world in recent months, leading some investors to worry valuations have risen too far. Indeed, yesterday's market sell-off is seen by many experts as a sign of things to come. Given that defensive sectors have led the surge, concerns have centred around those stocks in particular.
However, Crooke – manager of the Henderson High Income Trust and Bankers Investment Trust – says that there is still plenty of value in equity markets and claims that certain high-yielding markets are at good entry points.
“I think that the value is still in equities,” Crooke said. “They key for me as an equity investor is that I am buying into a company’s profit stream and I am paying for that businesses’ future earnings, which are now increasingly in line with the price of the equity.”
“As there is a recovery in earnings, why shouldn’t share prices recover?” he added.
Crooke says that the broad equity market fell so far during the financial crisis because their value was too high compared to underlying P/E [price-to-earnings] ratios.
However, he says that is not the case now, believing that investors who are concerned about rising equity prices are overreacting.
“Investors are paying on average about 12 to 13 times earnings, which is slightly less than historic levels, and they are getting dividend growth potential,” he said.
“The peak in equity prices in 2007 was not the same as it is now. Equities still look attractive while other asset classes such as gold and fixed income are now very overstretched.”
“Twelve to 13 times earnings are not silly levels at all and the yield of the FTSE All Share is around 3.5 per cent – having been as low as 2 per cent in the past.”
“The US, on 14 times earnings, is reaching mid-range. On a relative basis it is not an expensive market, but I think there is better value in Europe and if you are willing to be optimistic, the other very cheap region is Asia.”
Crooke admits that some defensive areas of the US are looking quite expensive, and urges investors in this area to be selective as a result.
“In the US the utilities and telecom sectors are on high multiples, which I struggle to defend; however, when you look globally, there are still very good opportunities,” he said.
“We still see value in the Asian and European income stocks, and that encompasses the UK. In telecoms like Vodafone, you have a yield of 5 per cent and the big oil companies still have good yields, too.”
Vodafone is the largest individual position in the Henderson High Income Trust, making up 4.7 per cent of the portfolio.
“I am optimistic and willing to say there isn’t another recession around the corner. As that is the case I am happy to hold more stable growth stocks,” Crooke added.
Crooke has managed the five crown rated Henderson High Income Trust since 1997 and the Bankers Investment Trust since June 2003.
According to FE Analytics, his Henderson High Income Trust has been the second best performing portfolio in the IT UK High Income sector over five years with returns of 79.91 per cent, beating its composite benchmark – split 80/20 between the FTSE All Share 20% Merrill Lynch Non-Gilt All Stocks Index – which has returned 40.11 per cent.
Performance of trust versus sector and index over 5yrs
Source: FE Analytic
The closed-ended fund has a headline yield of 4.60 per cent.
The Bankers Investment Trust has returned 220.20 per cent since Crooke has been at the helm, while the FTSE All Share has returned 158.93 per cent.
Crooke has a positive view on the global economy’s immediate future, and say the US is looking particularly healthy.
“If you look at the US the underlying growth is ok,” he said. “Before sequestration and other factors GDP growth is 3 per cent, but after that it is more like 2 per cent. We would die for that in this country.”
However, he says that if the US continues to do well, the likelihood is a rise in interest rates, which could cause big issues for bond investors in particular.
On his High Income Trust, Crooke has an 11.2 per cent weighting to the fixed interest market. He has cut the fund’s duration down to three years in recent months, to protect himself if rates rise.
“The question is, what would the trigger for interest rates to go up?” he said.
“When we should get worried is when lending rates go nuts, but I think the Bank of England will be quietly calm and push rates up slowly,” he added. “If the rates increases are staggered then equities should be fine. However, if we wake up tomorrow and interest rates are up 2 per cent then that would cause an issue.”
“If markets are bubbling along, yes wages will be higher so companies will put prices up, but if the economy is strong then they should be selling more stuff.”
“There will be an issue around interest rates in the future, but we will learn it all from the States as surely they will be the first to be in a position to increase interest rates. However, in the meantime I am happy to sit back in confidence while the economy recovers,” he added.
Henderson High Income has proven to be popular with investors and is trading on 2.8 per cent premium to its NAV.
It is geared at 22 per cent and has ongoing charges of 0.85 per cent, exclusive of performance fee.
The Bankers Trust, on the other hand, is trading on a 1.9 per cent discount and is only geared at 4 per cent. It has ongoing charges of 0.45 per cent, and doesn’t implement a performance fee.