The manager of the £1bn trust, who mostly buys dividend paying large and mega cap stocks on a longer term view, says he has bought Persimmon, Berkeley and Taylor Wimpey in expectation that the house builders will grow their dividends for the next two years.“The house building sector is cyclical and people have said to me ‘why is a fund like this buying house builders?’ but actually in the UK and particularly in the south east we are just not building enough houses,” he said.
“The companies I have bought all have large land banks which they bought in leaner years or have options on cheap land. They promise a very attractive dividend distribution going forward and therefore are in a sweet spot.”
“I firmly believe the next year or two will be a very profitable time to be in house builders. It’s higher beta; a riskier area but when you think about owning your own home is at the top of the list of what people want and land is very scarce.”
“Yes, they cyclical and it is a two-position sector – a buy and sell - but it is the moment in the cycle to enjoy the cash profits and dividends.”
Companies such as Persimmon, Berkeley, Bovis, Barratt and Taylor Wimpey have seen a huge re-rating in recent years after taking a battering in the wake of the financial crisis, which saw them lose up to 90 per cent between October 2007 and October 2008.
According to FE Analytics, the five main house builders are up between 100 and 400 per cent over the past three years while the FTSE All Share has gained 50.72 per cent.
Performance of stocks and index over 3yrs
Source: FE Analytics
The stocks have been amongst the leading beneficiaries of more positive economic sentiment and government policies such as ‘Help to Buy’ of late and have subsequently been amongst the best performers in the FTSE All Share.
However, Barratt and Taylor Wimpey are yet to fully recover to their pre-crisis highs and the past six months – following the Budget – increasing focus on a potential bubble in the housing market and a rise in interest rates from five years of historic lows has meant the five largest builders have seen their share price broadly flat or decline.
Performance of stocks and index since 20 March 2014
Source: FE Analytics
In 2014 the market has preferred less economically sensitive companies as rising interest rates and worries over overheating in the UK housing market have dominated investors’ concerns.
Curtis, who has managed the trust since 1991, says that his bet on house builders is probably the riskiest part of the portfolio.
His top ten holdings are dominated by large cap stocks such as Royal Dutch Shell, Vodafone, BAT, HSBC and BP.
The trust aims to produce a yield 15 to 30 per cent higher than that of the FTSE All Share, accounting for the manager’s preference for such stocks.
Since August 1995, as far as our data goes back, the trust has returned 339.48 per cent compared to an average return in the IT UK Equity Income sector of 269.26 per cent and a gain in the FTSE All Share of 297.26 per cent.
Performance of trust, sector and index since Aug 1995
Source: FE Analytics
Curtis has also bought real estate investment trust Land Securities to take advantage of rising rents.
“We are seeing rental growth as well as yield compression so it’s a good time to be in real estate.”
He concedes there is some concern over overheating in the London residential market although he says he doesn’t see it over spilling into the house builders’ core businesses outside of London.
Michael Hewson, chief market analyst at CMC Markets, says the recent slip in the performance of the share prices of house builders has a lot to do with potential new regulation on mortgages.
“London house prices in particular continue to rise exponentially though valuations here have little to do with mortgage availability or the lack of it, given the amount of foreign money coming into the property market here.”
“A large part of this decline can be put down to the Mortgage Market Review which, in April, set out new rules on affordability tests on new mortgages, over concerns that the old habits that led to the financial crisis in 2007 were starting to make a comeback.”
