After becoming accustomed to strong gains from equities, the relatively lacklustre performance of the FTSE All Share so far in 2014, certainly compared to 2012 and 2013, has left many investors frustrated.
Performance of index in 2014
Source: FE Analytics
A number of experts have suggested that this signals the top of the market as the FTSE 100 is close to its all-time high, while at the same time there are a number of headwinds facing investors such as the Scottish referendum, the prospect of higher interest rates and ongoing geo-political tensions in the Middle East and Ukraine.
Message, manager of the Old Mutual UK Equity Income fund, is far more sanguine, however, and says that there are no real reasons why investors should be running to the hills.“We’ve had a couple of strong years for equity markets and what we have seen is a pause for breath,” Message (pictured) said.
“The one thing that has changed is the broader stance on monetary policy. Investors have become very accustomed to low rates and now there is the prospect of higher rates for the first time in years. Investors don’t like change and uncertainty and therefore a lot of them have a taken a wait and see attitude.”
“From here, though, I am positive.”
Message says that over the last four years, there have always been potential headwinds which could have de-railed the market; such as the fiscal cliff in the US, tensions in the Middle East, the Japanese Tsunami and the crisis in Cyprus.
Performance of index over 4yrs
Source: FE Analytics
However, there was always the confidence, and the valuation support, that has kept the index moving higher.
He says that as companies’ profit growth is still relatively muted and investors are concerned about a rate hike by the Bank of England, there is that lack of confidence at the moment.
However, this is actually a good sign.
“Only time will tell how markets will perform, but if you look across the broader market on 13 times, it’s not that expensive. If we can get more profit growth, which I expect we will, then that will provide a boost,” Message said.
“We still have events like the Scottish referendum and the general election on the horizon, so there are reasons to be cautious.”
“However, it feels more like half-time, rather than full-time, for the cycle. I don’t think there is that sense of exuberance that is characteristic of being at the top of the cycle as lot of people are still cautious.”
His thoughts are similar to Andy Merricks', head of investments at Skerritts, who told FE Trustnet last week that investors shouldn’t be preparing for a major correction.
“What seems to be missing at the moment is mania, which is as good a forecast as any as to why we’re probably not close to a major correction,” Merricks (pictured) said.One of the reasons why Message is confident that the outlook is positive and the market will continue to trend higher is because consumer spending power will start to increase as wage growth returns.
“Wage growth has been pretty benign, but there is the battle between supermarkets to push prices lower and energy companies have already said prices aren’t going up; and this all going on at the same time unemployment levels are falling.”
Message has managed his £136.4m Old Mutual UK Equity Income fund since December 2009.
According to FE Analytics, the four crown-rated fund has been a top quartile performer in the IMA UK Equity Income sector over that time with returns 79.29 per cent, beating its benchmark – the FTSE All Share – by 21.7 percentage points.
Performance of fund vs sector and index since Dec 2009
Source: FE Analytics
Although Message hasn’t experienced a full market cycle, he has beaten the index and been a top quartile performer in three out of the four calendar years he has run the fund. The exception was in the falling market of 2011.
As Message told FE Trustnet earlier this week, he has been adding to banks recently, such as Lloyds, Barclays and HSBC, for their future dividend potential and because they will benefit from higher interest rates.
He has also been upping his exposure to mega-caps which have largely lagged in the recent rally because they offer decent dividends, with the likes of Rio Tinto, BHP Billiton and the oil majors entering the portfolio.
Message is fully invested as, unlike a large proportion of his peers, he hasn’t been upping his cash weighting either over fears of a correction or because there is a lack of value in the market.
“Typically, I’m always fully invested,” Message said.
“It’s not really my job to make strategic cash calls; I’m paid to run an equity income fund. I can still find good opportunities, as the fund yields 4 per cent, and it is up to the fund selectors to decide how much they want in cash.”
Old Mutual UK Equity Income is predominantly a FTSE 350 portfolio, though at the margin, Message has been reducing his exposure to certain domestic facing mid-caps which have performed well for him.
His largest sector weighting is financials, which make up 37 per cent of the fund, while he holds around 30 per cent spread across telecoms, industrials and oil and gas stocks.
The fund has an ongoing charges figure (OCF) is 0.96 per cent.