Equity markets have been stuck in a trading range over the summer months with trading volumes at their usual seasonal lows. However, with the prospect of the Fed tapering its quantitative easing programme on the horizon, many investors have become jittery over the potential for more volatility in the coming months. However Cholwill (pictured), who manages the five crown-rated Royal London UK Equity Income fund, says that although there could well be a number of market corrections over the short-term, these should not alarm investors.
"I remain of the view that in 12 months’ time, equity markets will be a fair bit higher than they are now," Cholwill said.
"However, at the moment I think we are probably going to see some volatility over the next three months or so as people will worry about the tapering of QE, whether it is going to happen and what might be the consequences," he added.
Although Cholwill says that the tapering of QE will definitely cause a stir in the market, the reasons behind the move are positive.
"August has been a very quiet month, like it usually is, as volumes are normally depressed at this time of year. However, the key thing that is troubling the market is the US and its tapering," he explained.
"Markets have turned schizophrenic as no-one seems to know if good news is actually good news or if bad news is good news. Economic data could well improve, but then the market might think 'oh hang on, that means tapering is one step closer'."
"I take a slightly more positive view than some of the bears out there as I think tapering will only happen when it is suitable to do so. I don’t think they will want to crush the economy by tapering too early and if it is done correctly, it won’t throw the recovery off track," he added.
However, the manager warns that some areas would be affected more than others by a reduction in QE.
"In the fall-out from tapering, areas such as the emerging markets or any economies that are funded by deficits could suffer the most. That means that one obvious area that would be hit would be the miners and commodities space in the UK," he added.
Cholwill has managed the five crown-rated £464m Royal London UK Equity Income fund since March 2005.
He has a proven track record of keeping on top of shorter term trends in the market. His fund has beaten both the IMA UK Equity Income sector and the FTSE All Share in each of the last six years, boasting top quartile returns in four of those 12-month periods.
In cumulative terms, Cholwill’s fund has been a top-quartile performer since he took it over in March 2005, with returns of 111.03 per cent. This means he has beaten the index by more than 25 percentage points.
Performance of fund vs sector and index since Mar 2005
Source: FE Analytics
The Royal London fund also sits in the top quartile over one, three and five years.
It has a yield of 3.83 per cent, with Cholwill predominantly favouring mid cap stocks over mega caps.
The FTSE 250 index has hit all-time highs over the last few months; however some experts now question whether valuations have become overstretched, especially compared with other areas of the UK market.
The index has significantly outperformed the FTSE 100 over that last 12 months.
Performance of indices over 1yr
Source: FE Analytics
However, unlike many of his peers, Cholwill is not concerned about valuations.
"When you look at the stock market from a headline level, the FTSE 100 does look cheaper than the FTSE mid cap index as metrics such as P/E [price-to-earnings] ratios are lower in the FTSE 100," he said.
"But, when you look at the FTSE’s lower valuations, it is a function of the cheapness of some of the mega caps. The top half of the FTSE 100 is significantly cheaper than the bottom half. It shows you can’t get away from needing to understand the valuations of individual companies."
"People have been worried about how well mid caps have performed but that is a response to their long-term fundamentals such as profits and dividend growth. A lot of the FTSE 100 companies have had negative earnings recently."
"The likes of Imperial Tobacco, Glencore and BHP Billiton have all had a steady decline in profits. Even GlaxoSmithKline has had a huge downgrade in earnings over the last 12 months or so."
"Low P/E ratios can be low for good reason," he added.
Although the manager says tapering is the current market buzz word, he warns that the ongoing eurozone debt crisis could rear its ugly head in the not-so-distant future.
"The other key risk is the eurozone, which has all gone very quiet recently," Cholwill said.
"Things do seem to be getting a little better in Europe, however we have elections in Germany coming up in a few weeks and no big policy changes are going to be made before an election so we will have to wait and see what happens."
"It could well be that there is an increased focus on Greece and her problems. There is a real possibility that the market could have a fright," he added.
Royal London UK Equity Income has an ongoing charges figure (OCF) of 1.29 per cent and requires a minimum investment of £1,000.
