It’s fair to say that markets haven’t become any less erratic this week, with things coming to a head yesterday when global markets plunged amid fears over the health of the world economy.
Crude oil prices also dipped below $27 per barrel yesterday and Fed chair Janet Yellen offered up a tentative statement in the latest US Monetary Policy Report when she stated that she wouldn’t “take [negative interest rates] off the table” and that there is always some chance of recession in the US every year.
Closer to home, mining giant Rio Tinto announced on Wednesday that it is keeping dividends flat now its underlying earnings have halved over the last year and Rolls Royce said this morning it would cut its dividend for the first time in 24 years.
This may all sound very gloomy but before you resort to breathing into a paper bag and selling off your entire portfolio, take a look at some of our best stories of the week – we promise, not everyone is miserable at the moment!
From the team at FE Trustnet, have a great weekend.
FE Trustnet readers bullish on equities but what are the experts doing?
Kicking off proceedings on a particularly positive note, senior reporter Daniel Lanyon found on Tuesday that only one out of 10 FE Trustnet readers are bearish enough on equities to de-risk portfolios at the moment.
A further 38 per cent of readers are actually increasing exposure while more than half are intending to keep their portfolio exactly the same as it was at the start of the year.
The good news doesn’t stop there – Lanyon asked a panel of investment professionals whether they shared our readers’ sentiments and for the most part, they’re also not planning on turning pale any time soon. However, some are holding tight in terms of buying over the short term.
“I have not become more negative on the fundamentals, rather waiting for a little more clarity and a little less hysteria,” Old Mutual’s Paul Craig said.
Ben Willis, head of research at Whitechurch Securities, also made no change to his strategy over January.
“In terms of asset allocation and taking into account risk profile, we were already positioned accordingly. We did not pre-empt the start to the year and so we did not have cash sitting on the side lines to put back in,” he explained.
Three trusts for investors worried by the “mirage” of FTSE 100 yield
A recent note from Stockdale Securities analysts Mark Brown, Joanna Parsons and Sam Banerjee argued that levels of dividend cover in different parts of the UK market suggest the 1 per cent yield advantage offered by the FTSE 100 “is a mirage”.
Within the note, the analysts also gave their recommendations for the year ahead. One of their picks – The Investment Company – could look attractive in light of the above point, as it is an income fund that focuses on the small-cap part of the market.
“[This trust] offers investors an opportunity to buy a combination of equity and debt instruments, some of which have highly attractive options attached. Thus, this portfolio should perform relatively well during periods of market volatility,” the analysts said.
“As the manager highlights, these periods should also generate significant investment opportunities. We therefore recommend that investors buy the fund at current levels for a combination of high dividend income and long-term growth.”
To find out the other two UK trusts highlighted by Stockdale Securities, take another look at the story.
Are global income managers really helping you diversify away from the UK?
It seems UK investors can’t go a day without being told to diversify away from the concentrated UK dividend market over fears of substantial reductions from some of the FTSE’s stalwart income paying stocks.
As such, they are being encouraged to look at funds in the IA Global Equity Income sector to do this but, as news editor Alex Paget found, very few managers in the peer group are helping investors in that respect.
His research showed, for example, that the average fund is 10 percentage points overweight the UK relative to the global index, 20 per cent hold more than 20 per cent in the UK, 72 per cent hold a UK stock in their top 10 and more than 30 per cent hold three or more in their top 10.
Many of those stocks also tend to be highly-popular holdings in the IA UK Equity Income sector as well.
% of sector constituents that hold UK blue-chips as top 10 holdings
Source: FE Analytics
“We know that one of the key reasons why clients own the fund and, indeed, why they own global income funds is to diversify their source of income outside of the UK. If we go and stuff our portfolio full of UK stocks, we are not being very helpful. That’s something you might think all global income managers would think about, but they don’t,” George Boyd-Bowman, manager of Neptune Global Income, said.
Following on from that, Paget therefore highlighted three global income funds that actively avoid the UK, but are also the most popularly held stocks in the IA UK Equity Income sector.
Will you kick yourself for ignoring these high yielding funds?
Reporter Lauren Mason built portfolios of the 10 highest-yielding and 10 lowest-yielding funds at the start of 2015 to see how well they’ve performed to date.
Surprisingly, the highest-yielders outperformed the lowest yielders on average, despite larger pay-outs to shareholders signalling that underlying stocks have lost some value or are witnessing negative investor sentiment.
Performance of composites since 2015
Source: FE Analytics
It transpired that the top-yielders consisted of a combination of smaller companies funds, which fell out of favour at the end of 2014 due to market volatility, and bombed-out oil stocks, which need no explanation as to why they weren’t exactly flavour of the month at the start of 2015.
The highest yielder was Unicorn UK Income, which outperformed its negatively-performing sector average with a 2.98 per cent total return thanks to the subsequent outperformance of small and mid-caps.
On the other end of the spectrum, the likes of UBS UK Equity Income and Allianz UK Equity Income more than doubled the underperformance of their peer group composite over the same time frame, thanks to their hefty oil & gas weightings.
James Clunie: Why I’m shorting growth stocks in Jupiter Absolute Return
In this article, James Clunie, manager of the Jupiter Absolute Return fund, explained how he is taking advantage of the biggest divide for 30 years between outperforming “growth” stocks and underperforming “value” ones.
Many fashionable growth companies are now trading on P/E ratios in the hundreds, which don’t discount any probability that they might fail, and Clunie says this is beginning to remind him of the run-up to the dotcom bubble – with the only difference being that buzzwords such as “price-to-click ratios” have been replaced with ones such as “disruptive technology”.
As a result, he is shorting a number of stocks with disruptive technology that command an excessive market premium – such as Netflix.
“Netflix is emblematic of the sort of glamour growth stock that is very much in vogue,” Clunie explained.
“With its streaming on demand service and exclusive programming, the company has been a disruptive force in the television market. According to Reuters, it trades at a price to earnings ratio of 285 times compared with a sector average of about 16 times earnings.”
“At that level, the market is expecting an exponential growth in subscriber numbers and unfettered execution of the company’s business strategy. There is little discount for risks such as an increase in content costs or competition from the likes of Amazon and YouTube.”
