While some fund managers think investing in defensive, high yielding companies is the best way to protect investors from volatility, others point to high valuations in the equity income sector, and would rather back materially cheap cyclical companies that have higher potential for growth.
While some managers – such as Cazenove’s Robin McDonald – are actively moving their portfolios out of equity income funds and into those with a focus on growth, the Jupiter Growth & Income portfolio has the flexibility to shift its focus depending on where manager Philip Matthews (pictured) sees value.The £253.4m fund sits in the IMA UK All Companies sector, which means it is not constrained by a specific income mandate like many in IMA UK Equity Income are.
The IMA sector definition states funds in the latter "must intend to achieve a historic yield on the distributable income in excess of 110 per cent of the FTSE All Share yield at the fund's year end".
This flexibility has allowed FE Alpha Manager Matthews to move in and out of economically sensitive growth stocks, which he has timed effectively since he was appointed lead manager in April 2006.
"It’s a fund that yields roughly in line with the market, but that isn’t constrained by IMA parameters," said Matthews.
"It has more of an income bias than one might expect being in the UK All Companies sector, but we also aim to keep up with our peers when the market climbs higher."
"You had a lot of funds in the 2008 downturn which lost a great deal and then rallied during the rebound, and similarly you had some which did well in the downturn, but lagged during the upturn."
"However, we’ve looked to rotate the portfolio so that we can outperform in both."
"We’ve seen dramatic shifts in market sentiment in the last five years. In my view, it would be wrong to hold the same portfolio of companies over the whole period, and not take advantage of the big swings."
Performance of fund vs sector and index
Source: FE Analytics
According to FE data, Jupiter Growth & Income lost 8.72 percentage points less than its sector in 2008, but managed to perform roughly in line with the market in 2009 and 2010.
It then protected more effectively against the downside once again in 2011, but has significantly outperformed so far this year.
"We’ve had three different periods since the crisis," Matthews said. "We were rewarded for being defensive in 2008, but then felt it was dangerous to hold super-defensive companies."
"We upped our exposure to global industrials through 2009 until 2010, but then reversed a lot of that last year when companies were at all-time highs in terms of share prices and had profits in excess of the peak of the cycle."
"Then in May this year following the sell-off, we moved in the other direction as valuations spread again."
Performance of fund vs sector and index over 5-yrs
Source: FE Analytics
In August last year, Matthews upped his weighting to what he deemed as "reliable cyclicals", including Renishaw, but felt there were too many risks to rotate his portfolio in a significant manner.
However, in May he made far bigger changes, increasing his exposure to UK banks for example, in which he is now overweight. He holds HSBC in his top-10 and has smaller positions in Barclays, Lloyds and RBS.
He also added 3i, Schroders and Rio Tinto, which have boosted performance.
Matthews believes certain areas of the defensive market are overvalued and could be susceptible to big falls if earnings data surprises on the downside.
He has recently cut his exposure to British American Tobacco (BAT) – a favourite with UK Equity Income managers – and Unilever.
The Jupiter Growth & Income fund has a minimum investment of £500 and a minimum top-up of £250. It carries an annual management charge (AMC) of 1.5 per cent and has a total expense ratio of 1.78 per cent.
Matthews’ view is in direct contrast with fellow Jupiter manager Anthony Nutt, who in a recent interview with FE Trustnet highlighted his much longer-term focus.