2014 so far has proven somewhat challenging for investors as UK equities have disappointed with a lack of meaningful progress. The FTSE All Share is up just 0.67 per cent while the FTSE 100 has fared a little worse with a 0.40 per cent gain after sentiment was dented by a range of concerns including geo-political tension, the spread of Ebola and renewed weakness in the eurozone.
Amid this, the average fund in the IMA UK Equity Income sector has managed to outperform both indices with a 2.03 per cent return. Clark’s £1bn Fidelity Moneybuilder Dividend fund, meanwhile, has gained 5.15 per cent over this time.
Performance of indices, sector and fund over 2014
Source: FE Analytics
Clark (pictured) is positive on UK equities as we move towards 2015, expecting a “decent year” after the consolidation that was seen in 2014. The FTSE 100 went into 2014 at around the 6,750 mark but is currently at 6,590 after enduring two brutal sell-offs in the latter half of the year.
“Valuations remain sound, we have decent yields on most of the stocks and balance sheets are strong, cash flows are strong - so I don’t really see a problem from that point of view,” the manager said.
“The other thing that’s very positive is economic growth is coming back, particularly in the US. I mention the US because it’s really the driver of growth in Europe and growth in the US will come here with time.”
Not that Clark is complacent about the risks the market faces, highlighting the election in May as an event that will cause uncertainty in the first half of the year and is likely to have ramifications in the months that follow.
The UK general election is widely seen as being too close to call. Labour and the Conservatives are not expected to take parliament on their own, while parties such UKIP and SNP have become increasingly popular. A close eye is also being kept on the Conservatives’ plan to hold an in/out referendum on the EU while Labour’s plans could have a negative impact on sectors such as utilities and housebuilders.
“I think the main challenge is a political challenge. We don’t know what the effect of the election will be in the early part of next year. It looks at the moment as though we’ll have a hung parliament but there could be negative issues arising from that,” Clark said.
“We also don’t know what the impact will be of the EU referendum when it comes - it could have a negative effect on business but we don’t know exactly at the moment.”
The manager also highlights the prospect of rising interest rates as another obvious headwind UK equities will have to cope with in the coming year. The timing of the first rise from the historic low of 0.5 per cent is not yet known but the market and economists are currently tipping it for late 2015.
“They will have to rise at some point but I think here what’s important to understand is that is unlikely they will rise very strongly like they did in the early 1970s, early 80s and early 90s when inflation was very strong. We don’t have the inflationary problem now so I think the interest rate rise will be more muted and therefore easier to deal with,” Clark said.
Despite these clouds on the horizon, the manager says two areas of the market have been drawing his attention - pharmaceuticals and anything linked to retail.
The pharmaceutical sector is where he sees the “main opportunity” for UK equity income investors, thanks to a recent reversal in its fortunes.
“The pharmaceutical sector went through a fairly long period over the past 10 years of what is known as the patent cliff, when a number of very mature products came off patent and the price came down heavily. That’s now over and we’re looking forward to a period of new growth where new pharmaceutical products will come onto the market,” he said.
“This is the main area of interest for investors going forward. For equity income investors you have strong yields and lowish valuations still in these companies.”
Fidelity Moneybuilder Dividend has 17.8 per cent of its portfolio in the healthcare sector, which is a significant overweight to the FTSE All Share’s 8.7 per cent weighting. AstraZeneca and GlaxoSmithKline are its two biggest positions, accounting for a respective 6.3 per cent and 6 per cent of the portfolio.
Both stocks are popular with UK equity income funds. FE Analytics shows 55 of the 90 funds in the sector count AstraZeneca as a top 10 holding while 62 have a major position in GlaxoSmithKline.
Clark adds: “The second area where I think we should look - and where I have been looking - is in all sectors exposed to the retail economy in the UK.”
“This has been an area that has been depressed for a long time but we see evidence that this will recover in 2015 with wage growth coming back and real incomes ending their long period of decline. In particular that means looking at the retail sector of course but also the banks, which are linked into the retail sector and where we see substantial recovery in 2015.”
Among the retail stocks owned by Fidelity Moneybuilder Dividend are Tesco, Primark owner Associated British Foods and Greggs although all are outside of the fund’s top 10. When it comes to the banks, the fund has both HSBC and Barclays in its top 10.
Clark has managed the five FE Crown-rated Fidelity Moneybuilder Dividend fund since September 2008, since when it has made first quartile returns of 81.59 per cent. As a point of comparison, the FTSE All Share is up just 59.01 per cent over this time.
Performance of fund vs sector and index over manager tenure
Source: FE Analytics
It’s achieved this with less volatility and a lower maximum drawdown, which shows the loss that would have been made if an investor bought at the peak and sold at the bottom, than both its average peer and the index.
Fidelity Moneybuilder Dividend has clean ongoing charges of 0.67 per cent and currently yields 4.17 per cent.
