The FE Alpha Manager, who heads up the newly launched CF Eden UK Opportunities fund, believes the time for holding dependable FTSE 100 stocks has run its course, and believes many could be set for a correction if there is even a hint of bad news. "Everyone still seems to be going on about income, but as far as I’m concerned it’s now yesterday’s game," he said.
"When you’re at the bottom of the cycle and these companies are cheap and are also paying a decent yield, you get a nice overall return, but now they’re anything but cheap."
"If we were having this conversation a year ago, I would have been talking up income, but I think the time to be buying up these companies has passed."
In the last year, the manager says he has cut his exposure to companies that have a “decent yield” from 30 per cent down to 10 per cent.
Himsworth thinks we are likely to see markets stay flat for the next two or three years at best. Although many view dividend-paying stocks as a decent hedge in times of market uncertainty, the manager believes they are likely to get hit hardest if there is another sell-off.
"Some of these defensive companies like Unilever and Diageo are fantastically run, but on every valuation metric they are way too expensive," he said.
"If the market suffers a big weakness, typically it’s the overpriced, liquid companies which have just made big gains that suffer the most."
Performance of stocks and index over 6-months
Source: FE Analytics
"Oil companies, on the other hand, have been under the cosh since March, and it’s the same story with industrials since June."
"Some of these companies have actually reacted to disappointing news quite well – for example iron ore manufacturer Ferrexpo, which had some bad figures last week – because the market was ready for them."
"However, there is no room for error for these defensive companies, which is always dangerous."
"I think we’ve reached a point where there should be a switch between defensives and industrials," he added.
Himsworth is the former manager of the sector-leading Franklin UK Mid 250 portfolio, as well as the Royal London UK Mid-Cap Growth fund.
According to FE data, he is one of the best-performing UK-focused managers of the last decade, returning 202.76 per cent, compared with 87.91 per cent from his peer group composite.
Performance of manager vs peer group composite over 10-yrs
Source: FE Analytics
The manager’s £23.3m CF Eden UK Opportunities fund has returned 12.99 per cent since it was launched in September 2011, compared with 10.67 per cent from its All Share benchmark. The portfolio has been more volatile, however.
It has a bias towards small and mid cap stocks, with 47 per cent of its assets in the FTSE 250, 34 per cent split between the FTSE AIM and FTSE Small Cap, and just 16 per cent in the FTSE 100. The remaining 3 per cent is in cash.
The fund is available for a minimum investment of £1,000 and has a total expense ratio (TER) of 1.96 per cent.
While looking at the macro and focusing on valuations is a big part of Himsworth’s process, he first and foremost prides himself as a bottom-up stock picker, attempting to identify secular shifts in the market. At the moment, he points to software as one of his preferred areas.
"Retail companies are faced with two difficulties at the moment: first of all the economic downturn, and secondly the secular shift to online shopping and 'click and collect'," he explained.
"I could hold the retailers that are increasing their capabilities online, but if you consider a quality company like Next can’t get the balance right, it shows how difficult it is to play this theme."
"I’ve found it’s best to hold the software companies themselves, like GB Group – an IT checking company, which checks your information when you open an account with a company like William Hill. It makes sure you give the right name, address, date of birth, password and so on."
He also holds NCC – another information security company – in his portfolio.