Message, who runs the £62.5m Old Mutual UK Equity Income fund, has a bullish outlook for UK equities, but warns investors against buying quality defensive companies which in his opinion are too expensive and could deliver disappointing earnings growth from their emerging market operations.
Instead, the manager says that he is focusing his portfolio towards domestically orientated names that he believes are set to benefit from the recovering UK economy. "Coming into this year, it didn’t feel that having a UK bias was the best strategy as the common view of the UK was its international exposure," he explained.
"However, at the margin the UK economy is improving and because of that, domestic companies have been well-positioned. We have large exposure to the likes of Howden Joinery, ITV and Greene King, all of which make their money in the UK."
"Actually, that has been the right thing to do. People always talk about the growth from the emerging markets, but at the moment the UK is acting like an emerging market," he added.
Our data shows that Howden Joinery and ITV have both returned more than 60 per cent to shareholders so far this year while pub group Greene King has returned 37.14 per cent. As a point of comparison, the FTSE All Share has returned 15 per cent.
Performance of stocks vs index year to date
Source: FE Analytics
All three of those stocks sit in Message’s top-10.
The manager says he is avoiding some of the more defensive areas of the market, such as tobacco and consumer goods companies, because he feels they are too overvalued and the medium-term outlook for those firms is uncertain.
"One big area we are avoiding is consumer goods stocks – the expensive defensives," he said.
"We don’t hold the likes of Unilever, Diageo, SAB Miller or Reckitt Benckiser. These are good companies, but that is reflected in the valuations. We do hold GlaxoSmithKline, but we don’t hold AstraZeneca because of drug line concerns."
"Let’s not forget, these so-called expensive defensives have high exposure to the emerging markets. Now, I’m not saying emerging markets are about to fall off a cliff, but I do think the volume growth expectations are too high from those regions."
"Plus, those high valuations are not pricing in disappointment from the emerging markets," he added.
Message took over the Old Mutual UK Equity Income fund from Michael Gifford in December 2009.
According to FE Analytics, it has been a top-quartile performer in the IMA UK Equity Income sector over that time with returns of 64.17 per cent, compared with 45.42 per cent from its FTSE All Share benchmark.
Performance of fund vs sector and index since Dec 2009
Source: FE Analytics
The fund is also a top-quartile performer over one and three years, although it has tended to be more volatile than the sector and index over these periods.
The fund yields 4.2 per cent, which Message obtains from a concentrated portfolio of 51 holdings. Message describes his fund as a "FTSE 350 fund" because he holds around 60 per cent in the FTSE 100 and 40 per cent in the FTSE 250.
He takes a value approach to investing, with a primary focus on companies that can deliver a growing dividend.
As stated earlier, Message is becoming more optimistic over the state of the global economy.
He says that although the market has become jittery over the prospects of the Fed tapering its asset purchasing programme, investors need to remember why the central banks are considering putting a stop to their quantitative easing.
"In terms of tapering, we are never going to have that monetary supply for ever," he said.
"But don’t forget, they are only going to end quantitative easing if they are confident that the economy is in a self-sustaining recovery. There will be wobbles along the line of course, but the market always has a buzz word like double-dip, triple-dip or fiscal cliff – which have disappeared."
"Do I think the world will be a better place next year? Yes," he said.
Nevertheless, Message says it would be naïve to think that there aren’t possible risks facing the market.
"It is fair to say that if there was nothing to be worried about then I would be worried," he explained.
"There are concerns over budget deficits and the slowdown in emerging markets; it just depends on what time of year it is. At the moment, the market is worried about China and these worries won’t go away over the short-term."
"However, these are becoming tail risks and people will become less and less concerned in the future. The next concern will probably be over German elections."
"The biggest issue last year was concerns over another credit crunch in Europe. The ECB provided a backstop, which was really important as fears over a credit crunch disappeared. But it also showed that crises don’t happen when people are looking for them," he added.
The Old Mutual UK Equity Income fund has an ongoing charges figure (OCF) of 1.73 per cent and requires a minimum investment of £1,000.