In 2014 a more bearish tone has been noticeable from investors and fund managers, with the FTSE 100 stalling for much of the year. On a number of occasions the index has approached its all-time high only to fall back to around the 6,500 mark.
Performance of index in 2014
Source: FE Analytics
Worries over the global economic recovery – particularly in Europe – as well as geo-political tensions between Ukraine and Russia, the Middle East and the threat of a global pandemic from the Ebola virus played out throughout most of the year.
It reduced sentiment sufficiently in September to push down the FTSE below 6,400 for the first time since 2012 with mid-caps, especially cyclicals, taking the biggest hit.
Stocks regarded as defensives such as Diageo and Unilever performed better. They are typically seen as holding up better when markets are weak or sentiment ebbs away, partly because of their regular dividends which tend to not fluctuate greatly when economic activity goes down and partly because capital flows increase to this part of the market in these periods.
However, Bolton believes improving sentiment, despite a likely tightening of monetary policy, will mean the outperformance of more cyclical parts of the market for the next few years.
“Globally, staple income stocks have been the big area where we have seen money flowing in to it over the past few years for lots of obvious reasons,” he said.
“The economic environment has been poor, earnings growth has disappointed and those stocks have given you a good return and had a high yield.”
“However the relative valuations are now stretched, they are not going to collapse but they expensive compared to other things in the market.”
“If growth comes back then typically those stocks are less geared to growth in the economy so they will underperform in that environment.”
While managers who specialise in such stocks like FE Alpha Manager Francis Brooke, who heads up the £2bn Trojan Income fund, have topped the tables in the IMA UK Equity Income sector this year, the UK All Companies sector has a more mixed collection of funds in the top decile of performance.
FE Alpha Manager Mark Barnett is top decile in 2014 for his three funds in the sector – Invesco Perpetual High Income, Invesco Perpetual Income and Invesco Perpetual UK Strategic Income – with SJP UK Income run by FE Alpha Manager Neil Woodford, who also favours defensives, just behind.
However, more cyclical and mid-cap dominated funds such as the £145m MFM Slater Growth and £34m MFM Slater Recovery funds, run by FE Alpha Manager Mark Slater, have done even better and top the tables by returning over 6 percentage points more than Barnett.
The £144m CF Miton UK Value Opportunities fund also considerably outperformed, just behind SJP UK Income despite a complete avoidance of large defensives.
Performance of funds, sector and index in 2014
Source: FE Analytics
Ben Lofthouse, who heads up the £649m Henderson Global Equity Income fund and the closed £50m Henderson International Income Trust, disagrees with Bolton, believing value persists in global mega-cap equities because investors’ bearish positioning is helping to re-rate such stocks.
“For 10-year bonds to be up significantly and gilt yields to be back down at 2 per cent in the US, the recovery that everyone was hoping for earlier in the year and the interest rate rises that they thought would come, just haven't come.”
He recently said the economic recovery was slow with growth in both workers’ and companies’ earnings sluggish
“Defensives have somewhat led the market up when normally defensives only beat it when the market falls,” he explained.
“If you have a recovering world, stock markets should go up and you should need more oil and need more commodities but actually you have a world where we are recovering slowly but wage growth isn't coming through as quickly as we thought.”
Bolton says he expects cyclicals will be the place to be for investors looking to beat the index.
“Some of the financials and the more cyclically linked stocks is really where the value is at the moment,” he explained.
“Mid-caps are also starting to look attractive again, particularly in Europe, relative to large caps. There is definitely some value there”
He believes Europe, as well as Japan, will be the standout best equity market performers next year.
Bolton told FE Trustnet that improving outlooks and sentiment in both the eurozone and Japan will provide a significant boost to the country’s equity markets.
