Despite a ratcheting up of volatility in equity income stocks of late, markets look set to make further ground over the medium-term, according to Liontrust’s Jan Luthman.
The manager of the £544m Liontrust Macro Equity Income fund, who believes greater bid activity, growing company profits and a lack of opportunities in other asset classes should continue to drive stock market gains, has been busy over the past month with portfolio changes.
“M&A deal volumes remain elevated and demonstrative of an ongoing appetite for stocks, Q2 earnings continue to surpass expectations, debt looks deeply unattractive on a comparative basis, monetary policy remains accommodative and macro data continues to yield signs of gathering economic recovery.” Luthman said.
While he has not added any new positions he has made some substantial increases to some holdings as well as exiting others such as Swiss pharmaceutical giant Roche, which he says looks set to see damage to competition for its key cancer drugs.
Sells: Standard Life & Vodafone
The two UK stocks Luthman has been selling are amoung the year’s best performers, with both returning around 30 per cent in 2015. The manager believes they are now looking risky despite a solid period of growth.
Performance stocks and index over 1yr
Source: FE Analytics
Luthman has been selling down Standard Life as a hedge against the forthcoming UK pension review and the prospect of a less favourable pension tax regime. He also thinks the contribution of the £26bn Standard Life GARS fund to group earnings makes the business vulnerable to “concentration risk”.
Standard Life recently said it expected a lower contribution to its results for 2015 from annuities due to changes to UK pension rules. It also revealed a fall in pre-tax profits to £230m – the current revenue from GARS is around £200m.
Vodafone has seen its share price take a boost from accelerating sales growth, but Luthman says the likelihood of an asset swap with Liberty Media has diminished, making it less attractive and subject to a fall.
Buys: BT & Phoenix Group
These two stocks have also had a strong year but Luthman is expecting a lot more upside to come from BT & Phoenix Group, the respective telecoms group and insurance provider.
Performance stocks and index over 1yr
Source: FE Analytics
“BT’s Q1 earnings document continued delivery in consumer [markets], with strong fibre broadband and TV subscription numbers and evidence of strong early trading in BT’s nascent mobile business,” Luthman said.
The firm has already signed up 100,000 customers to its new mobile service and has ramped the availability of its superfast fibre broadband to 80 per cent of all UK households, according to Ian Forrestor, an analyst at the Share Centre.
“These are good, solid figures from BT which show a continuation of the trends we saw in the previous quarter and point to the great potential for growth over the next few years with its new mobile and superfast broadband services,” Forrester said.
“Subsequently, we recommend BT as a 'buy' as it continues to transform into the dominant telecoms provider in the UK, develops full value from the EE takeover and uses its strong cash flows to raise dividends well above inflation.”
Luthman (pictured) says Phoenix is seeing its closed-book consolidation business underpin earnings growth and is on track for investment-grade credit rating in 2015.
Luthman has co-managed the Liontrust Macro Equity Income fund with fellow FE Alpha Manager Stephen Bailey since 2003. He has outperformed both sector and index in every calendar year bar two, and from a cumulative perspective is ahead over one, three, five and 10 year periods.
The fund has also been the best performing portfolio in the IA UK Equity Income sector since its launch in October 2003, returning 232.29 per cent
compared to 163.02 per cent from the sector average and a gain in the FTSE All Share of 159.75 per cent.
Performance of fund versus sector and index since launch
Source: FE Analytics
Despite being in the IA UK Equity Income sector, the fund does not concentrate on typical dividend-paying stocks and looks across the market-cap spectrum as well as to other countries such as the US which currently has a 16 per cent weighting.
Luthman has less than 40 per cent in the FTSE 100, more than one-quarter of assets in mid-caps and close to 19 per cent in international companies.
The fund appears in the FE Select 100 list of recommended portfolios. FE Research said:
“The best way to look at the fund is over a long period: the themes that the managers identify are meant to change society, which takes a long time. The managers do not focus on short-term losses because they are confident they can be recovered.”
Liontrust Macro Equity Income has a clean ongoing charges figure of 0.9 per cent and a current yield of 4.14 per cent.
