There isn’t enough self-sustaining momentum in Asia and emerging markets for 2015’s headwinds to be resolved in the New Year, according to Thomas Moore (pictured below).
The manager, who runs the five crown-rated Standard Life Investments UK Equity Income Unconstrained fund, is generally cautious as we head into 2016 following the likely continuation of low commodity prices and global growth slowdown.
Last year has been marked as both a disappointing and volatile year for UK investors with the FTSE 100 closing on a record high in April, then plummeting and losing £60bn during August’s global sell-off and ending 2015 on a 1.32 per cent loss.
Performance of index in 2015
Source: FE Analytics
With many hoping that this year will provide a greater wealth of opportunities and a more positive macroeconomic backdrop, Moore warns that volatile market conditions may remain with us throughout the rest of 2016. 
“It’s natural when everybody returns from a long Christmas break to start the New Year expecting there to be change, and I think the surprise might be that actually, conditions that are necessary for change to happen aren’t there,” he said.
The manager isn’t the only industry professional to maintain a cautious outlook at the moment. In an article published this morning, FE Trustnet took a look at the funds headed up by FE Alpha Managers that are holding historically large cash weightings – these include the likes of GLG’s Henry Dixon, Henderson’s Bill McQuaker and GAM’s Andrew Green.
“It is the belief of the investment team that preservation of capital should take precedence in the decision of whether or not to hold elevated levels of cash, even if that means incurring a potential opportunity cost in the short term,” Green said.
“In an environment of inflated US valuations as well as the current stage of the credit cycle, and the potential cyclical peak in the inventory cycle, cash holds a vital role in not only being able to navigate potential turbulence with less impact on capital, but also in actually being able to take advantage of opportunities that present themselves along the way.”
However, Moore’s £1.1bn fund currently has just a 4.4 per cent cash weighting, as he says that there are still many opportunities for investors so long as they are unafraid to stray from the benchmark.
SLI UK Equity Income Unconstrained can, as its name suggests, invest across the entire market cap spectrum, and at the moment Moore is seeing better opportunities in UK small and mid-caps than he is in FTSE 100-listed companies.
He says that the dividend cover of the blue-chip index peaked at 3x in 2011. Now though, he says that the ratio of earnings versus dividends is becoming more stretched and that it currently sits at less than 1.5x as a result of falling earnings and companies’ attempts to maintain dividends.
“It’s a big concern for income investors who are heavily exposed to the FTSE 100. It’s names like GlaxoSmithKline, it’s names like BP, like Shell, where earnings are falling and dividends are going to come into sharper focus,” he said.
“There will be a boardroom debate at many of these companies. The directors are going to have to debate to what extent they can carry on distributing an increasing percentage of their earnings and cash-flows.”
“I think that is still a risk for the UK market and 52 per cent of the UK dividends come from the top 10 names, so it’s something that matters to all of us. Anybody who has a pension fund that has exposure to these large-cap stocks with huge dividends needs to think about this.”
Because of this, Moore focuses on a company’s underlying fundamentals before he invests and whether it is able to protect its dividends, rather than beginning with a screen of the highest dividend-yielders.
The fund currently has a top-decile alpha ratio as a result of this, which measures performance in addition to its benchmark, over Moore’s seven-year tenure. The reason the manager has increased his weighting to smaller companies recently to take advantage of high-growth consumer plays, as mentioned in an article last week.
“When we invest in a company, the thesis we have on that company tends to play out over a number of years. We’re happy with the portfolio the way it stands, and there’s not a lot changing in terms of the macro,” he explained.
“I’m still pretty cautious on the macro outlook for global growth in 2016. There are industrial recessions in many parts of the world already, led by China but spreading into the US. I’m cautious on global economic activity, but there’s still growth among the US, European and UK consumer which we can take advantage of in the fund. The names we’ve been looking at have been self-help stories or consumer stories with some kind of growth angle.”
The manager says that the consumer discretionary sector within developed markets has been boosted by the collapse in commodity and oil prices, which has left people with excess cash to spend.
In a similar fashion to last year’s headwinds, he doesn’t believe that this theme is likely to disappear in 2016 and says that it is still a good area of the market to look for new opportunities in.
“The world is going to be a tough place in 2016, and there is a wall of worry that there’s going to be climbed,” Moore continued.
“Even in the first week in January 2016, we saw jitters and I think you may find that we see these headwinds continue in terms of the slowdown in emerging markets such as China and the recessions in countries like Brazil, and people will periodically focus on those problem countries.”
“But ultimately that is supportive for the western European and US consumer, because as long as those countries are slowing, commodity prices are under pressure and household consumer disposable income is picking up.”
“I think there is going to be nervousness in 2016, but I think in many respects there are going to be echoes of what’s already happened in 2015 in terms of the tailwinds as well as the headwinds.”
Over Moore’s tenure, Standard Life Investments UK Equity Income Unconstrained has provided a total return of 220.8 per cent, outperforming its sector average by 107.03 percentage points.
Performance of fund vs sector over management tenure
Source: FE Analytics
The fund has a clean ongoing charges figure of 1.15 per cent and yields 3.87 per cent.
