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Brewin Dolphin: The funds you should be buying and selling

15 April 2014

Brewin Dolphin’s Elaine Coverley reveals which funds in a variety of different sectors she is recommending investors buy and sell.

By Daniel Lanyon,

Reporter, FE Trustnet

Investors should sell down funds with exposure to pharmaceuticals and life assurers and up their exposure to retail, mining and utilities stocks, according to Elaine Coverley, head of equity research at wealth manager Brewin Dolphin.

In terms of overall asset allocation, Coverley remains overweight in equities and says she expects them to continue to perform throughout 2014 but advises caution on certain sectors.

“Recent political and regulatory changes, particularly following the dispute over energy prices and new measures introduced by the Budget, meaning investors should review their sectoral exposure and upgrade or downgrade their holdings where necessary,” she said.


Sell – Pharmaceuticals

Pharmaceutical stocks have rallied over the past year leading some investors to worry they are now overvalued.

“The recent rally has been driven largely by AstraZeneca which has seen increased optimism for its pipeline assets, particularly in immune oncology, but it cannot demonstrate the depth of experience or resources of its competitors in this area,” Coverley said.

Over the past year AstraZeneca has returned 17.83 per cent compared to a rise in the FTSE All Share of 8.43 per cent.

Performance of stock vs index over 1yr


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Source: FE Analytics

“The strong outperformance of Shire has also contributed to the rally,” she added. “With the sector now trading at over 15x and the market on c.13x with higher growth prospects, the short term growth outlook is poor and indeed negative for this year.”

In the IMA universe 82 funds hold AstraZeneca as a top 10 ten holding including the £2.6bn Threadneedle UK Equity Income run by FE Alpha Manager Leigh Harrison.

The stock is held as the five crown-rated fund’s largest position with 6.6 per cent of the portfolio invested in it.

Harrison recently dismissed concerns
the stock and similar pharmaceutical stocks held for their bond-proxy like characteristics were in a bubble, but accepts that the stellar returns over the past year are unlikely to be repeated this year.

Another FE Alpha Manager, Invesco’s Mark Barnett, recently said the sector was still a key area for income investors and that he was not planning to sell out any time soon.

Other top funds with high weightings to pharmaceuticals include Henderson Global Equity Income, MFM Slater Growth and Schroder Prime UK Equity which all have more than 10 per cent of their holdings in the sector.



Sell – Life assurers

Coverley says despite a number of strengths such as good dividends, improving cost control and growth the life insurance sector is precarious following the shake up to the pensions industry announced in the recent Budget.

“We are downgrading it due to relatively full valuations and the unknown impact of the Budget changes,” she said.

“In addition, the sector may come under added Government and regulatory scrutiny, particularly if further actions are seen as potential ‘vote winners’ as we have seen with the utilities sector.”

The sector took a huge hit in the aftermath of Budget. However, this led several managers to up their exposure, claiming the sell-off has made the stocks look cheap.

One such manager is Schroders’ Philip Matthews who recently added Partnership Assurance Group to his UK Alpha Plus fund.

It has fallen 59.12 per cent since the announcement compared to a relatively flat performance in the FTSE All Share which has fallen 0.77 per cent.

Performance of stock since Budget


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Source: FE Analytics

Mathews says he chose the stock because it was the most negatively hit by the Budget, making it cheapest buy.


Buy – Mining

The mining sector has been a contentious area for investment over the past few years after a sustained period of overexpansion in capital expenditure coupled with falling demand for commodities in China, its largest market.

Coverley says that despite thinking a secular bull cycle is over, commodities and companies could benefit from a cyclical rally.

Over three years the sector is down almost 30 per cent, the FTSE All Share by comparison has risen 26.79 per cent.


Performance of sector vs index over 3yrs

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Source: FE Analytics

However, this has led several managers to take a contrarian position particularly in the mega cap stocks such BHP Billiton and Rio Tinto.

Over the past year a series of management shake-ups and cost-cutting on balance sheets has re-invigorated interest from investors in the companies.

“Yields for these companies are beginning to look attractive, 3.5 – 4 per cent for the higher quality major miners, are well covered, and are likely to grow, which will appeal to those looking for income.”

“The higher quality miners have improved capital discipline, cut capital expenditure and are now free cash flow positive,” Coverley said.

Rio Tinto has done particularly well, rising almost 15 per cent over the past year.

Performance of stock over 1yr


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Source: FE Analytics

The JOHCM UK Equity Income fund has recently taken a high exposure to the sector. It holds both Rio Tinto and Glencore Xstrata as top 10 holdings.

Helal Miah, investment research analyst at The Share Centre also likes Rio Tinto and recommends it as a ‘buy’ despite the company recently announcing figures falling short of expectation due to weather and maintenance difficulties.

Fidelity’s Michael Clark recently told FE Trustnet that he thought the sector was too risky for an income investor.


Buy – Utilities

The utilities sector has been popular with equity income portfolios for several years but the announcement of a likely investigation into the Big Six energy companies has led some to question the political threat to its continued ability to deliver reliable dividends.

However, Coverley says this has been priced into stocks recently making them fair-valued.

“Following a low in January, the outlook for the Utilities sector is improving. This is partly driven by the recovery in Centrica and SSE as the political risk becomes priced in and helped further by the recovery in the water stocks as Ofwat’s regulatory review provided some clarity.”

“That said, investors should consider the possible ramifications of Scottish independence, which could result in stranded generation and network assets.”

Funds with high exposure to utilities include Invesco Perpetual Income & Growth, Legg Mason UK Equity and Newton Higher Income which all have over 10 per cent of their portfolio in the sector.



Buy – Retail

Coverley, is also generally bullish for the UK retail sector but advises some caution over valuations, saying the sector’s valuation relative to its history remains high.

“As the UK consumer seems to be at the beginning of a multi-year phase of growth, the outlook for general retail looks positive and we are pleasantly surprised by improving sales growth,” she said

“This is particularly true of Kingfisher and Next, tellingly the sector’s two largest components and whose earnings growth should be strong.”

The two stocks have beaten the FTSE All Share over three years, with a particularly strong performance from Next which has returned a massive 223.03 per cent. The FTSE All Share by comparison has risen 26.79 per cent over the same period.

Performance of stocks over 3yrs

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Source: FE Analytics

Funds with high exposure to the sector include Artemis UK Growth, FF&P UK Equity Income and RWC Income Opportunities, which all have more their 10 per cent of their portfolios exposed to the sector.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.