Skip to the content

Martin Cholwill: The biggest threat to your UK fund

30 October 2014

Royal London’s Martin Cholwill explains why he is avoiding any areas of the UK market which could become a battleground in the build-up to next year’s general election.

By Alex Paget,

Senior Reporter, FE Trustnet

Investors should avoid areas of the market which are sensitive to political intervention in the build-up to next year’s general election, according to Martin Cholwill, who has earmarked energy providers, banks and housebuilders as potential battlegrounds that should be retreated from.

Cholwill, manager of the five crown-rated Royal London UK Equity Income fund, says political pressure on certain industries is only going to continue over the coming months as both main parties attempt to drum up supporters.

Investors will already be well-aware of Labour leader Ed Miliband’s plans to freeze energy costs, which caused shares in Centrica to plummet last year, and chancellor George Osbourne’s changes to the pension system, which in turn has put huge pressure on annuity providers.

However, though the manager is bullish on the wider UK equity market, he warns that investors could be punished even more if they are exposed to areas that are at risk of “political intervention”.

ALT_TAG “While the economic backdrop is good if you pick the right sort of companies, it is not a situation where a rising tide will lift all boats because I think you need to be very aware of the industries that are sensitive to political intervention,” Cholwill (pictured) said.

“It’s clear that banks are a longstanding example and we’ve seen, over the last 12 months, that energy suppliers have started to fit into that category; such as the fallout from Centrica where there has been downgrades in earnings forecasts and we’ve had the departure of the chief finance director and the chairman.”

Performance of stock over 2yrs

ALT_TAG
Source: FE Analytics

“I think people need to think more laterally about which parts of the economy could be impacted by politics, because we are about to enter what will be an intense pre-election period. There will be a lot of kite-flying about potential policies and a lot of scares about potential interventions.”

One area Cholwill is particularly concerned about is the housebuilders and, as a result, he has no exposure to them despite their stellar gains over recent years.

“If I just put down a marker on a sector that I’m currently avoiding, which is quite popular with investors, it’s housebuilders,” Cholwill said. “They are flying high at the moment as the market background is strong. But clearly the stimulus from the help-to-buy scheme is very important to that.”

“The whole reason the government put that in place was because they wanted more houses to be built. However, the response from the housebuilders has been to say ‘thank you very much’ and as a group they have focused very much on special dividends and returning more to shareholders – rather than stepping up building programmes.”

According to FE Analytics, housebuilders such as Galliford Try, Persimmon and Barratt Developments have returned 72.51 per cent, 77.95 per cent and 122.01 per cent over the last two years, while the wider UK equity market is up just 20 per cent.

Performance of stocks versus index over 2yrs

ALT_TAG

Source: FE Analytics

Given that they are viewed as a play on the recovering UK economy, they have become increasingly popular with UK managers. The likes of Old Mutual UK Dynamic Equity, Marlborough Multi Cap Income, MFM Slater Income and PFS Chelverton UK Equity Income all have decent weightings to the sector.

However, Cholwill is avoiding them at all costs.

He added: “I think it might well be that when politicians revisit this they might be unhappy and may change what they are doing in order to engineer more houses being built. There are a number of potential policy initiatives out there and I think that might impact on housebuilders.”

It’s not all doom and gloom, however, as the manager has used the recent sell-off in the UK equity market to take advantage of attractively priced companies. One of which has been GlaxoSmithKline, the FTSE 100 pharmaceutical giant.

“It had been a very small holding for me despite its premium yield and enthusiasm within the stock broking community,” Cholwill said. “However, if you see the share price of the recent past, you’ll see that the shares have underperformed significantly so far this year.”

Performance of stock versus index in 2014

ALT_TAG

Source: FE Analytics


“With a dividend yield north of 5.5 per cent approaching 6 per cent, it seems to be an attractive opportunity. Sentiment is now much more negative on the shares and as shown by recent results, the management has confirmed that this year’s dividend will be confirmed and they have also confirmed that the 2015 dividend will be maintained.”

He added: “So, while a number of the brokers were worried about the risk of a dividend cut, I think those risks have been put on the back burner for a while.”

Cholwill has managed the £1.4bn Royal London UK Equity Income fund since March 2005.

According to FE Analytics, it has been the third best performing portfolio in the IMA UK Equity Income sector over that time with returns of 127.78 per cent, beating its FTSE All Share by more than 40 percentage points in the process.

Performance of fund versus sector and index since Mar 2005

ALT_TAG

Source: FE Analytics

The fund also boasts top decile returns over one, three, five and seven years, as it has beaten the sector in every year since Cholwill has been in charge.

It currently yields 3.87 per cent and has performed well in terms of its income generation. If investors bought £1,000 worth of units in the fund in January 2007, they would have earned £305.89p over the following seven years. The average fund in the sector paid out £287.50p on that amount over the period in question.

The fund has increased its income payout in four of the last five years.

It must be noted, as part of our income campaign, that Royal London UK Equity Income is one of the few funds which publishes its dividend history on its factsheet. The fund has an ongoing charges figure (OCF) of 0.66 per cent.

ALT_TAG

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.