There is a lack of good value opportunities in the FTSE 100 at the moment despite the index bearing the brunt of the recent sell-off, according to FE Alpha Manager George Godber, who has taken the CF Miton UK Value Opportunities fund’s blue-chip exposure to almost its lowest level ever. 
2015 so far has presented the FTSE 100 with a rocky ride. The index is currently down 6.53 per cent over the year to date; while it passed the psychologically important 7,000 mark in March, it has handed back its gains following the Greek debt crisis and, more recently, worries over the health of the Chinese economy.
Given that the falls in index have been sharper than those in the FTSE 250 and the FTSE Small Cap – which are both in positive territory for the year so far – many commentators have suggested that the FTSE 100 could be on the cusp of some value-led outperformance.
Even small and mid-cap veteran Neil Hermon, who heads the Henderson UK Smaller Companies fund and investment trust, told us: “On shorter term view you are likely to see large-caps outperform small-caps.”
Price performance of indices over 2015 to date
Source: FE Analytics
Godber (pictured), on the other hand, is far from convinced that the FTSE 100 is a good hunting ground for investors at the moment and says large swathes of the index are “dramatically” failing the ‘safety check’ he and co-manager Georgina Hamilton perform on all potential holdings.
“We are really struggling to find value in the FTSE 100. We have almost our lowest exposure there since launch – we have five FTSE 100 shares in now and when we launched we had 25,” he said.
“What you’ve seen in the last two and a half years is the good bit of the FTSE 100 – the Unilevers, the SABs – have become very expensive. They are very high-quality companies, but they’re also priced that way.”
“The bad bits, or those that have too much debt or fail our safety check when it comes to cash flows analysis, are the mining sector, oil companies food retailing and the banks. You’re sticking a line through quite a lot of the market when you rule out those companies.”
“This means we believe it’s a stock-picker’s market right. You don’t just want to stick to the index at the moment because the landmines are real. We’ve had nine FTSE 100 dividend cuts this year. And they’re not tiny companies, they’re big ones.”
FTSE 100 names that have cut their dividends this year include the likes of Tesco, Severn Trent, Centrica and, most recently, Glencore. Some investors believe further cuts are on the horizon, with Standard Life UK Equity Income Unconstrained manager Thomas Moore being one that thinks the payouts of giants such as GlaxoSmithKline, Royal Dutch Shell and BP have question marks over them.
“There are risks among a large number mega caps that are widely held,” he told us last year. “It needs to be at the front of investors’ minds. These well-held mega caps are facing top-line pressure which requires a significant cost-cutting response to maintain dividends at current levels.”
Godber, whose £378.1m CF Miton UK Value Opportunities fund is up over three months despite the falls in the sector and UK equities, holds a similar view.
Performance of fund vs sector and index over 3 months
Source: FE Analytics
“In the total, the market has lost £3.7bn of income and on average the shares that have cut their dividend this year have fallen by over 20 per cent. The bullets are real and they’re flying around,” he said.
“We don’t think that’s it for the dividend cuts and we’re expecting more. There will be others in the mining space and the oil ones might not come until next year, but we will see.”
This means that the recent sell-off failed to create any opportunities for the manager to exploit. While the fund holds five FTSE 100 companies – Barrett Homes, International Airlines Group, Mondi, Imperial Tobacco and British Telecom – existing positions in small and mid-caps where added to rather than larger companies.
Godber points out that this was unlike previous corrections, where the fund used them to top up holdings in the blue-chip space.
“If you look to October [2014], when the market had quite a vicious sell-off, we added six FTSE 100 shares in two days including British Telecom, Next, WS Atkins and Shire. Likewise in December we were also able to add some FTSE 100,” he said.
“This time we haven’t. The bits of the FTSE 100 we would love to buy back – like ITV – just haven’t got cheap enough. It’s really frustrating – there’s nothing we like more than buying companies we love at the right prices. That’s not say it won’t happen but they’re just not quite there.”
Since launch in March 2013, the fund has posted a 57.93 per cent total, making it the second best performing member of the IA UK All Companies sector where the average gain has been just 16.14 per cent. The fund has no benchmark, but as a point of reference the FTSE All Share has risen only 9.56 per cent over this time.
Performance of fund vs sector and index since launch
Source: FE Analytics
It’s not only total returns that the fund stands out on since launch. Our data shows it is one of the top three funds in its peer group when it comes to the following metrics: alpha generation, downside risk, maximum drawdown, risk-adjusted returns measured by the Sharpe, Sortino and Treynor ratios, annualised volatility and number of positive months.
CF Miton UK Value Opportunities has a clean ongoing charges figure (OCF) of 0.89 per cent.
