The UK’s blue chip index currently stands at 6,951 at the time of writing having broken through its record high last week, even breaching 6,965 yesterday. Ten-year gilts, while still near their historical lows, now yield 1.86 per cent after starting the year close to 1.2 per cent.
Outside of the UK, ECB president Mario Draghi finalised a date (9 March) for his large-scale bond buying programme, which – along with more positive growth expectations – caused European equities to rally.
The current market conditions and our access to shed loads of data meant we have had plenty of things to write about.
Here, we highlight five of our favourites including an income study, a reaction to Warren Buffett’s most recent note to Berkshire Hathaway shareholders and a look at four UK managers every investor should hold.
Have a great weekend.
The UK income funds facing the highest dividend risks
We start off with a study conducted on Tuesday, which was a follow-on from an article where Franklin’s Colin Morton warned that four of the most popular UK dividend paying companies – Vodafone, BP, Shell and GlaxoSmithKline – had challenged dividends over the coming years, which could put the IA UK Equity Income sector in a potentially dire situation.
“What is scary about those four companies – BP, Shell, GlaxoSmithKline and Vodafone – is when you put them together, they make up around 25 to 30 per cent of all the dividends the UK market pays,” Morton said.
In the article we looked at just how popular the four stocks are with UK income managers.
Source: FE Analytics
We also looked at which funds not only have a large proportion of their assets in the four stocks, but also derive a high amount of their income from the mega-cap giants.
If investors want to find out roughly how concentrated their fund’s dividend are, it is an easy calculation to do, as you take the amount the stock makes up of a fund, times that figure by the stock’s dividend yield and then divide it by the fund’s yield.
Dampier: Why Causer and Woolnough have made me nervous about my bond funds
To kick off the week, head of FE Trustnet content Joshua Ausden spoke to Mark Dampier, the respected head of research at Hargreaves Lansdown, about the outlook for fixed income given that yields are now so low.
Dampier had fought against the bond bears for some time and reaped the rewards, but is now starting to question how much longer bonds’ strong run can go on.
Conversations with star managers Paul Causer and Richard Woolnough have convinced Dampier that a rate rise is imminent, which would cause havoc for one of his biggest personal holdings: Eric Holt’s Royal London Sterling Extra Yield Bond fund.
“I had Woolnough and Causer in last week, and both are wary of there being a change in the cycle. Paul is of the impression that there will be a rate rise this year, which would the first shift in policy for six years. It suggests there is a turn in the cycle and I haven’t a clue how bonds will react. However, I don’t think the risk is currently priced in,” he said.
“I don’t think it will be massive. In 1994 they doubled rates and bonds sold off 20 per cent. However, the mere mention of a rate rise has caused a couple of taper tantrums, so exactly what will happen when policy actually changes is worrying. Bonds could see a hefty sell-off.”
“A bear market in risk-taking”: Is Buffett right about investors’ volatility fear?
In this article, news editor Gary Jackson delved into legendary investor Warren Buffett’s annual letter to Berkshire Hathaway shareholders, where the “Sage of Omaha” reminded investors that volatility is not something they should always be afraid of and also warned about the cost that an obsession with safety can have on a long-term portfolio.
“If the investor, instead, fears price volatility, erroneously viewing it as a measure of risk, he may, ironically, end up doing some very risky things,” Buffett said.
“Recall, if you will, the pundits who six years ago bemoaned falling stock prices and advised investing in ‘safe’ treasury bills or bank certificates of deposit. People who heeded this sermon are now earning a pittance on sums they had previously expected would finance a pleasant retirement.”
A number of industry experts agreed with Buffett’s comments, with F&C’s Rob Burdett saying that “there has been a bear market in risk-taking” as investors have felt too scared to buy equities, but have hindered future possible returns by buying perceived safe, but now very expensive, assets.
Premier’s Simon-Evan Cook added: “It’s very hard to argue with anything Warren Buffett says. Perhaps that’s why I don’t. This time is no different. His comments on investors’ unhealthy focus on volatility are spot on.”
Biotech bubble: Sell-off is looming large, warns small cap manager
Biotech is the trendiest asset class at the moment, due to the innovative technology coming through and the stellar returns the sector has delivered over recent years.
The popularity of biotech funds is all too clear to see as well, given that AXA Framlington Biotech – which is the only portfolio in IA universe to focus purely on the high growth sector – is regularly the most read factsheet on FE Trustnet.
Performance of indices over 7yrs
Source: FE Analytics
However, following a fact finding mission to New York, reporter Daniel Lanyon wrote how investors cannot expect biotech stocks to keep surging forward.
He spoke to Royce Associates’ Lauren Romeo while in the ‘Big Apple’, who warned “desperate investors” are pumping up the rapidly growing biotechnology sector to the point it has become liable to a material sell-off.
“It has hurt being out of that sector but we still feel like it is good to stick to our discipline [as] valuations are getting into bubble territory. It feels like that time in terms of the euphoria in terms of what has been going on in that space. We are wary of this sector,” she said.
McQuaker’s best of breed UK managers every investor should hold
We end this week’s round-up with an article from reporter Lauren Mason.
Last week, she wrote how FE Alpha Manager Bill McQuaker had been selling his UK equity holdings across his Henderson Multimanager range due to the huge uncertainty facing markets in the build up to May’s general election.
However, he has kept four UK funds in his portfolio – JOHCM’s John Wood, Old Mutual’s Richard Buxton, the team at Majedie and Nick Train – noting that the funds are portfolios every investor should hold.
“We own large-cap and experienced managers; you’ll see that across the portfolio. We like people who are good at what they do, [managers] who if the markets are going up will do well and in some cases will do exceptionally well,” McQuaker said.
“When the world turns against you, we usually have a lot of exposure to people who can deal with the downside.”
Meanwhile, on Trustnet Direct…
Woodford Patient Capital Trust: The risks no one is talking about
Over at Trustnet Direct, production editor Anthony Luzio noticed that all of the press coverage greeting the launch of the Patient Capital Trust has been overwhelmingly positive.
He pointed out that although Neil Woodford deserves all the praise he has been receiving for his performance over the past decade and beyond, history is littered with examples of fund managers believed to be invincible who ended up flying too close to the sun.