Reid, who manages Majedie UK Income, says his portfolio is biased towards a developed market recovery and he is avoiding companies that derive a large proportion of earnings from emerging economies.
Many growth investors have already benefited from the domestic recovery through UK banks, which are bouncing back from the financial crash and PPI scandal.
Performance of indices over 2yrs
Source: FE Analytics
However, only a small number of UK banks have been in a strong enough position to pay out a dividend recently, meaning that investors who need income have largely been unable to play this theme.
Reid (pictured) says that the UK’s “cut and dried” regulatory system means banks won’t be the best hunting ground for income investors in the future. Instead, he favours more general financials because a number of them are improving their business models, are undervalued and are paying a decent dividend. “Majedie UK Income is an improvement fund, not a recovery fund, because it is very difficult to generate income from those sorts of companies, and income is very important to us,” Reid said.
“We had 16 per cent dividend growth last year, which was 112 per cent ahead of the FTSE All Share. It is not just about stockpicking and I think a focus on income is important because it makes us more disciplined.”
“We have to be paid while we wait and one sector we like is general financials,” he added.
As a result, Reid’s fund has a large weighting to the likes of hedge fund managers, investment groups and insurers.
“General financials make up around 35 per cent of the fund’s NAV,” he explained. “We think these businesses are easier to improve [than banks], have a stronger balance sheet and have better cash generation.
“Also, because many people think they are difficult to understand, a lot of them don’t want to invest in the sector. However, if you put the research in and do your homework, then you can find some excellent opportunities.”
“We hold the likes of Aviva, Man Group, Tullet Prebon and 3i. Quite often it is the case that these sorts of companies are quite easy to turn around. We have seen quite a few management changes recently, 3i is one example, where the new management has cut costs and improved the quality of its assets.”
3i Group – which is listed on the FTSE 250 – is one of the UK’s largest multinational private equity and venture capital firms. It currently only yields 2 per cent, but has increased its dividend over the last three years.
It was, however, one of the FSTE All Share’s worst-hit stocks in the crash year of 2008, losing more than 70 per cent, and lost a further 43 per cent in the falling market of 2011.
Nevertheless, a change at the top and an improving economic backdrop have meant 3i has bounced back, with the investment trust returning more than 100 per cent over the last two years.
Performance of trust vs sector and index over 2yrs
Source: FE Analytics
That share price performance means that 3i Group is now looking expensive, given the fact that it is trading on a 16.5 per cent premium to its NAV.
Reid says that Man Group, which is also listed on the FTSE 250, is a much better value play for income investors.
“Another, which is still one of our major positions, is Man Group,” Reid said.
“It is absolutely loathed by the stock market and it is trading at book value and has a high yield, however it too has had a management change and they are beginning to improve the business,” he added.
After a period of miserable share price performance, Man Group fell out of the FTSE 100 into the mid cap index. However, Reid has become increasingly bullish on the stock since a new chief executive was put in place last year.
While the share price has lost another 3 per cent over the last 12 months, it does have a dividend yield of 10 per cent.
Reid sticks to bottom-up analysis instead of making big macro calls, but says that stocks such as Man Group will be an obvious beneficiary of an improving economic backdrop.
“I don’t like to focus too much on the macro,” he said.
“However, we don’t have much in terms of emerging markets exposure in the fund and instead it is skewed towards the developed markets. I doubt we will see spectacular growth or huge economic expansion, but more muddle-through growth.”
“However, within that sort of backdrop you can find more than enough opportunities in the general financials sector,” Reid added.
Reid’s thoughts are similar to those of Henderson’s Ben Lofthouse, who recently told FE Trustnet that more cyclical income-paying stocks will drive the market as the economy improves and bond yields rise.
Reid has managed his £255m Majedie UK Income fund since its launch in December 2011.
According to FE Analytics, over that time it has been the seventh best-performing fund in the IMA UK Equity Income sector, with returns of 67.22 per cent, beating the FTSE All Share by close to 30 percentage points.
Performance of fund vs sector and index since Dec 2011
Source: FE Analytics
It is also a top-quartile performer over one year.
The fund has a yield of 3.56 per cent – which is paid out twice a year – which Reid generates from a mid cap heavy portfolio: the FTSE 250 makes up 45.9 per cent of the fund’s assets.
Aviva, Man Group, 3i Group and Tullett Prebon all feature in Reid’s list of top 10 holdings, as do other turnaround income plays such as BP and Rio Tinto.
Majedie UK Income has an ongoing charges figure of 1.67 per cent and requires a minimum investment of £10,000.
