However, the manager of the 125m GLG Undervalued Assets, £73m GLG UK Income funds and £93m FP Matterley Undervalued Assets funds says investors are still best off in equities due to a scant lack of opportunity elsewhere.
Since bottoming out in April 2009 the FTSE 100 has rebounded more than 110 per cent, but has been largely flat in 2014 compared to the strongly rising markets of 2013 and 2012.
Performance of index since Apr 2009
Source: FE Analytics
Dixon highlights consumer staples and retailers as two sectors within the FTSE 100 that have reached the highest valuations.
Over the past three years the FTSE All Share General Retailers index, which is largely composed of FTSE 100 stocks, has gained over 110 per cent, more than double the rate of the FTSE All Share and FTSE 100.
Performance of indices over 3yrs
Source: FE Analytics
The UK equity space has been characterised by a rotation from mid-caps into large and mega-caps in 2014, leading several managers to move into larger cap names, hoping to take advantage of the rally.
After performing at twice the speed of larger caps for the previous few years, this year the FTSE 250 has lagged behind the FTSE 100, gaining 2.4 per cent compared to 4.04 per cent.
Performance of indices in 2014
Source: FE Analytics
A recent FE Trustnet article highlighted that active UK equity funds were struggling to outperform the market in 2014 with seven of the 20 best performing UK All Companies funds of the past six months being FTSE trackers.
The best performing funds this year have tended to be those with a heavy weighting to UK mega-caps such as Neil Woodford’s SJP UK High Income, Franklin UK Blue Chip, Invesco Perpetual UK Strategic Income, Invesco Perpetual Income and JOHCM UK Opportunities.
While none of the top-10 performing funds were trackers, the 10-20 bracket is packed full of passives, including the Royal London UK All Share Tracker and HSBC FTSE 100 index.
Dixon has revised his outlook to be more bullish on equity markets since the start of the year despite high valuations.
“At the start of the year we thought that the re-rating that UK equities had enjoyed would struggle to push on any further throughout the year, having enjoyed two and half years of re-rating.”
“We thought that in the face of rising interest rates and diminishing central bank liquidity it would struggle to gain ground. However, we have a great deal of confidence that earnings would grow in the region of 7-8 per cent and that would provide the capital upside with a 3 per cent dividend yield.”
“Due to the recent performance of the bond market and the foreign exchange market we think that is going to happen despite [the fact] more than half the equity market has been expensive since May 2013.”
He says the market’s current anticipation of a less difficult transition to a higher rate environment will make it unlikely it will sell-off in the near term.
“We feel very strong downside protection starts to kick in around 6300 on the FTSE 100, although that is 500 points below where we are today.”
Dixon says it could also help the FTSE edge above its psychological barrier of 7000 points and reach an all-time high before the end of the year.
“We are not ruling out the FTSE 100 pushing through 7000 points this year but it will be fleeting because 60 per cent of shares are in the FTSE 100 are still too expensive. That is largely representative of FTSE All Share as well.”
“A lot of people would use this as an opportunity to ask what the point is of bothering with equities but in an environment where the market has done very little we have still managed to post attractive returns.”
“The thing we have to watch out for in all asset classes is inflation trending above target because that may mean an acceleration of interest rate rises. It is the one thing we are very conscious of.”
Dixon says he has recently sold out of Friends Life and reduced exposure in Direct Line Trinity Mirror and is looking to take positions in WPP and GKN.
“They are shares that, all things being equal, have performed well but have been punished very hard because of missing their earnings because of the translation effect as sterling appreciated [to its recent high].”
