Moore, who manages the £680m Standard Life UK Equity Income Unconstrained fund, has been avoiding some of the most ubiquitous stocks in the IMA UK Equity Income sector – GlaxoSmithKline, Royal Dutch Shell and BP – due to a belief they are at risk of cutting their dividends.He told FE Trustnet earlier in the week that investors should be wary of potential cuts to blue chip stocks’ dividends due to falls in the price of oil in the cases of BP and Shell and the fragile sales figures of GlaxoSmithKline.
Instead, the manager has been piling into mid-cap stocks over the past few months, particularly following recent market falls, to provide his fund’s yield.
Mid-caps have been the worst performing part of the UK equity market during 2014, following several years of significant outperformance after markets rebounded rapidly from the losses in 2011 when the European sovereign debt crisis brought back the threat of recession.
According to FE Analytics, the FTSE 250 is down 2.85 per cent while the FTSE Small cap index has lost 2.57 per cent and the FTSE 100 1.97 per cent since the start of the year.
Performance of indices in 2014
Source: FE Analytics
Moore says he increased exposure to large caps earlier in 2014 after the market sold off but has recently moved back into mid and small caps.
“In the FTSE 100 we got to around 40 per cent in Q1 and have been consistently averaging that level but subsequently we have been reducing our exposure to large caps and increasing our exposure to small and mid-caps because we believe that is where the best opportunities lie. We are now 33 per cent FTSE 100, 54 per cent FTSE 250 and 12.5 per cent FTSE Small Cap,” he explained.
“The earnings prospects of UK domestic companies has improved rapidly in recent weeks and so now I am more positive than I have been for at least a year about the prospects for our holdings in UK domestics.”
“It looks like the consumer is set for its first year of real income growth. It looks like the mortgage market is set for another rebound and consumers going to petrol pumps are going to be happily surprised by the price they are going to pay to fill up their tanks. There are some exciting trends in store in the next few months with UK domestic bias.”
“The FTSE 350 has 34 per cent of its revenue coming from the UK; we have 48 per cent so we think we are positioned to benefit from the likely strong trend we are going to see from UK domestic companies.”
Here, the manager reveals the stocks he has been buying to take a boost from a mid-cap rally and rise in consumer spending.
Restaurant Group
Moore says he expects consumer cyclicals will benefit, in particular the travel and leisure sector.
“The beauty of this year has been there was plenty of opportunity to build positons at times when the markets are feeling pessimistic. On those concerns the FTSE 250 has got very cheap and so it was good opportunity to add to names like Restaurant Group, where there has been no change to fundamentals.”
Restaurant Group owns several well-known restaurant chains including Frankie and Benny’s, Garfunkel’s and Chiquito. Moore says it will be a key beneficiary of higher consumer spending.
“With this stock you’re seeing the same organic growth that you have seen in the past few years in new restaurant openings that have provided organic growth in earnings and a high return on investor capital. However, it also has consistent record of growing dividends every year and the management is confident as it has ever been of continuing to grow earnings.”
Over the past three years the stock has gained 151.29 per cent compared to 34.98 per cent in the FTSE All Share.
Since mid-caps sold off it March it is still down 4.59 per cent.
Performance of stock and index over 3yrs
Source: FE Analytics
Close Brothers
Moore is also very bullish on financials subsequent to his view of the UK being set for further growth, particularly in domestic sectors.
Despite having bought this financial services group in January 2009 he still believes it is cheap today because of the growth predictions around its dividend, which has grown consistently since the financial crisis.
“The growth prospects stem from the strong positons with their small and medium-sized clients. They are an authentic ‘challenger bank’ and not just one that sprang up from nowhere – which we have seen recently. They have been doing it since before it became a known phrase.”
Over the past three years it has gained 122.43 per cent but has been more volatile than the market and has been through several periods where it has lost more than 10 per cent.
Performance of stock and index over 3yrs
Source: FE Analytics
Paragon
Moore has also added an entirely new position in this financial group which specialise in, amongst other areas, buy-to-let mortgages.
“It is a new position in which we are really excited about the prospect for dividends over the medium term. It looks very cheap considering its dividend growth is continuing rapidly. It didn’t have non-performing loans in the crisis but where they struggled in 2008 was its banking facility with Royal Bank of Scotland that got pulled and so they didn’t have a diverse enough funding structure.”
“They are far less dependent on wholesale funding than they were since 2008 so it is now back on the front foot and there is plenty of demand out there.”
Over the past three years it has gained 136.13 per cent compared to 34.98 per cent in the FTSE All Share.
Performance of stock and index over 3yrs
Source: FE Analytics
However, it suffered heavily in the mid-cap sell-off in March 2014 and is still down 15 per cent from its high although is slightly up – 0.78 per cent – after bottoming out in May.
