The FTSE All Share is down 2.69 per cent in the year to date, putting it on course for its worst January since 2010, when it lost 3.57 per cent.
Performance of index in 2014
Source: FE Analytics
While the manager doesn’t expect an all-out correction, he does see a year fraught with turmoil ahead and says there are few places to hide from the volatility. As a result, he says investors need to avoid specific sectors.
“It’s difficult to know where to hide if markets are going to have a difficult period,” he said. “Everything’s looking a bit wobbly.”
“I am very anxious. I rather hope tapering isn’t going to be too difficult. There will likely be more QE in Europe, but I’m still worried. The outlook for growth is very patchy.” “The recovery in Europe just isn’t really happening.”
One of the biggest headwinds Williams (pictured) sees on the horizon is the fate of the beleaguered emerging markets, which he says will have a bigger impact on large companies in the UK than investors realise.
“It’s getting more difficult for big caps,” he said. “It’s ambiguous whether emerging markets are going to be [able to grow]. Large multinationals are exposed and affected. They will be undermined by currency falls.”
As a result, Williams is avoiding major global FTSE 100 names because he believes they will be hung out to dry if the situation in global markets worsens.
The manager says the banks will be hit hard, particularly names such as HSBC and Standard Chartered which have large operations in emerging markets, especially China, whose slowing growth remains a dark cloud on the horizon.
“We’ve reduced our weighting to banks because they are more exposed to most emerging markets,” he said.
Williams is also avoiding mining and commodities stocks due to their dependence on demand from emerging markets.
“If China slows down, commodity prices will come down,” he said.
In terms of the UK, he is also wary of utilities because he says they are heavily indebted.
“I’m avoiding companies with high levels of debt, because if things become more wobbly they will have a difficult time,” he explained.
“Utilities are a greater concern because they’ve taken on more debt and it’s more difficult for those companies with the highest debt. It will be difficult paying their dividends.”
While he says nearly all utilities are exposed to this threat, he highlights Scottish and Southern Energy (SSE) as a prime example.
“They’ve continued to increase their dividends, but the trend just doesn’t seem sustainable,” he said.
However, Williams says there are a few stock-specific example out there – such as Drax, which he holds – that are not heavily indebted and can keep their head above water in troubled markets.
Star UK equity manager Richard Buxton also holds Drax in his Old Mutual UK Alpha fund.
Williams says the best thing investors can do at the moment is look for companies with sensational balance sheets that have strong growth potential, something he admits is more difficult to do in these markets. However, he says there are far more opportunities further down the market cap spectrum.
“It’s much easier to find these in smaller companies,” he said.
Small- and medium-sized companies have led the rally in equities in the UK over the last 18 months, and Williams recently told FE Trustnet there was no sign this theme had run its course.
“For big international companies to deliver growth,” he said, “they need international growth. Small caps, on the other hand, have a great ability to effectively push water uphill.”
Williams’ CF Miton UK Multi Cap Income fund has had a strong start to its life, its returns of 37.62 per cent meaning it has doubled the gains of its peers.
The fund has made 79.03 per cent since launch in October 2011, compared with 42.02 per cent from the IMA UK Equity Income sector.
The fund doesn’t have a specified benchmark, but as a point of comparison, the FTSE 100 made just 34.55 per cent over this period.
Performance of fund vs sector and index since launch
Source: FE Analytics
The fund is yielding 3.63 per cent.
The manager’s bent toward small caps has, perhaps surprisingly, not made the fund more volatile than the sector and index.
CF Miton Multi Cap Income has been nearly half as volatile as the FTSE All Share over the past 12 months, with an annualised score of 6.28 per cent. The IMA UK Equity Income sector had a score of 9.6 per cent, according to FE Analytics.
Williams runs a diversified portfolio, with no more than 2 per cent in any one stock. Its largest holding, software and computer services firm Quindell, makes up just 1.66 per cent of AUM.
The largest sector weighting in the portfolio is to telecommunications, media and technology stocks, at nearly 20 per cent of AUM.
Insurance is the next highest weighting at 12.17 per cent. The manager currently holds nearly 10 per cent of the fund in cash.
The fund requires a minimum investment of £1,000 and has ongoing charges of 1.77 per cent.
