A combination of the FTSE 100 nearing its all-time highs, lacklustre earnings growth and unusually low volatility has led some investors to become concerned about the direction of markets in the coming months.
However Cholwill, manager of the five crown-rated Royal London UK Equity Income fund, says investors can afford to take risk within their portfolios as the FTSE will continue to push on from its current level.
“I still think that, as a whole, the stock market will make relatively decent gains in 2014 and grind higher,” Cholwill (pictured) said.
The manager says that although a strengthening UK economy is positive for equities, the major reason why he thinks the FTSE will end the year higher is because there aren’t any other attractive asset classes in the current environment.He says that because Mark Carney, governor of the Bank of England, has already warned investors that he is planning to raise interest rates from their low levels, more money is likely to move out of the already expensive bond market.
“I still think equities can perform well in this economic backdrop as we are certainly a long way away from a recession. Also, with interest rates expected to rise, where do you put your money other than the stock market?”
“I don’t think you want to be buying gilts in this environment. Investors will either be buying equities enthusiastically or reluctantly. Either way, there aren’t any other options.”
Most experts agree that an environment of rising rates won’t be good for traditional fixed income assets, but a number of those also warn this will create quite severe volatility in the equity markets as well.
However, Cholwill says that the first rate hike will have a minimal impact as the Bank of England will only want to take small, incremental steps so that it doesn’t kill off the UK’s so far unbalanced economic recovery.
“The Bank of England is well aware of the impact high interest rates, and therefore mortgage rates, will have on typical households.”
FE Alpha Manager Mark Martin, who runs the five crown-rated Neptune UK Mid Cap fund, recently told FE Trustnet that the market has already priced in the effects of rising interest rates, so investors would be wrong to sell now.
Despite this, several industry experts have said that there are various signs that suggest a sell-off is on the horizon.
Performance of index over 3yrs
Source: FE Analytics
Many of them anticipate some form of “blood-letting” correction as the consistent gains from UK equities over recent years have squeezed value out of the market.
On top of that, they point to the imminent tightening of monetary policy, over-optimism within the investor community and growing geo-political tensions in areas such as eastern Europe as reasons to exercise caution.
While Cholwill admits that there are risks on the horizon, he doesn’t think they have the power to de-rail the market.
“I’m not saying the next six months will be easy for active managers, but when we look back at 2014, the UK market will have made progress from here.”
Chowill has managed his five crown-rated Royal London UK Equity Income fund since March 2005.
According to FE Analytics, it has been the third best performing portfolio in the IMA UK Equity Income sector over this time with returns of 138.47 per cent, beating its FTSE All Share benchmark by close to 40 percentage points.
Performance of fund vs sector and index since Mar 2005
Source: FE Analytics
The fund is also a top-decile performer over one, three and five years.
Consistency has driven Cholwill’s outperformance, as his fund has beaten the sector in every full calendar year since he took over.
Royal London UK Equity Income has turned in top quartile returns in this year’s flat market as well and is currently up against the FTSE All Share.
Performance of fund vs sector and index in 2014
Source: FE Analytics
Those strong past returns have been recognised by investors, with our data showing that the fund tops the sector’s bestsellers list over the past year. Its AUM was £506.29m this time last year, but it now weighs in at £1.4bn.
Although Cholwill says liquidity is something he keeps a close eye on, he adds that the fund can continue to grow to a much larger size.
“I think it is right to raise the issue because if a fund gets too big, you can’t move it around as likely as you want to,” he said.
“However, I think my investment process is very scalable. I have never been that big on small caps and though I have a lot of mid caps, market capitalisations on the index range from under one billion to several billion pounds, so I have a broad range of companies to choose from.”
“I have had no problems with liquidity. If I was running the amount of money some other UK equity income managers run, I would find it a challenge, but this is just a fraction of the size of those funds so there is still plenty of headroom.”
Royal London UK Equity Income is primarily a FTSE 350 fund. However, Cholwill says that recently he has been upping his exposure to a number of mega caps such as Royal Dutch Shell and GlaxoSmithKline due to low valuations and attractive dividend yields.
The fund yields 3.54 per cent and its ongoing charges figure (OCF) is 0.66 per cent.
