Near record-low yields in the fixed interest market and the strong performance of dividend-paying companies since the financial crisis has meant that compelling value in traditional income sectors has been hard to find.
Willis still thinks there is select value in the equity income market and has identified two portfolios as potential alternatives to bonds.
“We’re just about to increase our property exposure,” said Willis (pictured), who is also on the AFI panel of industry experts. “We’ve been using it as a bond proxy of late, and it’s encouraging to see that the market has beaten government bonds and inflation.”
“We are now looking at the secondary market in the UK, and have chosen the Threadneedle UK Property fund to play this.”
“It’s smaller and more nimble than the big players in the market. London has had a very good run but we’re a lot more comfortable holding property these days and we think it’s time to look down the food chain.”
“Valuations have certainly got more challenging in equities and there is a strong correlation between the UK economy and the property market.”
Willis says he will be adding the fund to Whitechurch’s income, cautious and balanced portfolios. The £448m fund, which has been run by Don Jordison since its launch in February 2007, is currently yielding 4.4 per cent – well in excess of the FTSE All Share.
The fund invests predominantly in real estate, but can have some exposure to shares and bonds associated with the property sector.
As Willis said, Jordison looks beyond the primary market in the south east, with nothing invested in London. Top-10 positions include retail property in Harpenden, as well as retail warehouses in Anglesea and Fareham.
Just over half of the fund’s assets are invested in the south of England, with the rest split between the north, Midlands, Wales and Scotland.
Threadneedle’s focus on the secondary market has cost the fund recently, and it is well behind its IPD UK Monthly All Property benchmark over one, three and five years.
However, Willis says he expects this style to come back into vogue as sentiment towards the UK economy improves.
Performance of fund and index over 3yrs
Source: FE Analytics
“I think that primary and even high secondary property has been done to death to be honest,” he said.
“We’re ready to look elsewhere.”
Whitechurch already holds the much larger M&G Property Portfolio and Henderson UK Property funds, which have more of a tilt towards the primary market.
“We’ve bought this one to sit alongside these two, as it does something different,” he added.
Willis’s decision to add the Threadneedle property fund is a result of his general optimism, which also goes a long way in explaining his second choice: Lazard Global Active Global Listed Infrastructure.
He highlights infrastructure as another effective bond proxy, and he particularly likes its ability to protect investors from inflation.
“We’ve held the First State Global Listed Infrastructure fund for some time, which is a low-beta defensive play. Basically all it does is yields, which is all we want it to do,” Willis said.
“We’ve now added the Lazard fund to this, which reflects our general view of the world. It’s very different to First State, with less in the US and more in racier areas such as Europe.”
“The fund has a good yield but should also allow us to capture a bit more of the upside. Combined with the more defensive First State fund, we think it’s a good way to play infrastructure,” he added.
Peter Meaney and Andrew Greenup’s First State Global Listed Infrastructure fund has been a strong performer since its launch in October 2007. It has returned 51.96 per cent over the period, almost doubling the returns of its IMA Global sector average, with less volatility.
Under the management of Bertrand Cliquet since February 2012, Lazard Global Active Global Listed Infrastructure has performed much better than its First State rival, although it has been more volatile.
Performance of funds and index since Feb 2012
Source: FE Analytics
FE data shows the fund has returned 44.9 per cent over the past two years or so, compared with 19.84 per cent from Meaney and Greenup. It has also easily outperformed the UBS Global Infrastructure & Utilities 50/50 index, which both Lazard and First State take as their benchmark.
While First State has almost a third of its assets in the relative safety of the US, Lazard has just 13.9 per cent in the country. Europe ex UK is Cliquet’s biggest regional weighting, at 50.9 per cent, including a 19.9 per cent position in Italy.
Willis says the fund is set to benefit if the recovery in Europe continues to take hold.
Australia, France and Japan are also significant holdings for the manager.
Lazard Global Active Global Listed Infrastructure is predominantly institutional, but is available on certain platforms, including Transact. It is currently yielding 2.44 per cent, compared with First State Global Listed Infrastructure’s 2.77 per cent.
