The manager of the £37m mid-cap focused fund has had a difficult 2014 partly due to the sell-off in small and mid-caps at the start of the year.
The FTSE 250 index has performed badly in 2014 after soaring in 2013, following investors’ anxiety over valuations and the potentially negative impact of interest rates hikes.
In 2013 the FTSE 250 gained 32.27 per cent while the FTSE 100 made 18.66 per cent.
This year the mid cap sell-off and geo-political worry meant generally flatter equity markets with the FTSE 250 gaining just 2.32 per cent and the FTSE 100 fairing only slightly higher at 4.83 per cent.
Performance of fund, sector and index in 2014
Source: FE Analytics
Frikkee says this underwhelming trend will continue for at least 12 months although she adds that pockets of value still exist, with valuations generally supportive for a modest performance.
“The market is not expensive and hasn't done very much but we will remain in an environment where monetary conditions - QE and interest rates - are tightening for some time. However, markets will only plummet if the brakes are slammed on and I don't see that happening.”
“Certainly for next 12 months I can see that returns will be gentle and we will have to see how things work out. However, overall I am quite optimistic and this portfolio is growth focused but I acknowledged that this may mean we get battered about a bit.”
Frikkee says that while markets will be quiet the spectre of rate rises and their implementation will cause them “to wobble”.
“We know rates will go up and you will get volatility around that but I think markets will be ok and be gentle but they can still make progress.”
“If there is a gentle tapping of the brake then equity markets could do reasonably well but there will be heightened uncertainty around it.”
Since Frikkee took over the Smith &Williamson UK Equity Income fund in July 2013 it has returned 18.04 outperforming the IMA UK All Companies sector average of 16.46 per cent and the fund’s benchmark – the FTSE All Share – which gained 14.53 per cent.
Performance of fund, sector and index since July 2013
Source: FE Analytics
However, since the start of the year the fund has lagged behind the sector average and FTSE All Share with returns of just 2.87 per cent.
Performance of fund, sector and index in 2014
Source: FE Analytics
The manager says the returns the fund saw in 2013 of over 30 per cent will not be repeated for several years at least but that an improving mid-cap market will mean higher returns than in the past eight months.
“The mid-cap underperformance in the first half of the year was a reason why my fund lagged but August was good - we have seen a bit of a reversal. When the mid cap reversal happened it seemed very much across the board. People thought that valuations were too high and that earnings would disappoint so had to sell them.”
“But I used the sell-off to add to some mid-cap names and what I have seen since is that mid-caps’ results have beaten expectations. I will be staying very stock specific and if the majority of my stocks start moving to toward sell targets I will sell them.”
Frikkee previously ran the £1.9bn Newton Higher Income fund between 2004 and December 2012. The fund grew as large as £2.7bn when she was running it in 2011.
During this period the fund had a very strict yield policy of only investing in companies with a yield 20 per cent higher than the All Share, but it has since relaxed targets to help bring growth as well as income.
Frikkee is running a more contrarian approach in the new fund, buying mid cap stocks that have been de-rated.
“You should buy when news flow is bad and people are downgrading because when everybody sells it can only go up. If there are no concerns then generally there are no opportunities.”
“I quite like stocks where a lot of things get thrown at it, if it is a fundamentally strong business. For example, I have been increasing exposure to Centrica which operates in the tough political climate of the UK.”
“I like to think about whether things are going to get worse or better as there is usually more fretting than actual financial impact around events. Scottish independence for example - people are going to be fretting a lot about that.”
The fund has ongoing charges of 0.82 per cent. It currently yields 4.28 per cent.
