Since the months of May and June where investors took profits from their early year gains, UK equities have continued to surge with the FTSE All Share returning close to 10 per cent over the last three months.
Performance of index over 3 months
Source: FE Analytics
Though Frikkee, who manages the Smith & Williamson UK Equity Income fund, is generally bullish on UK equities, she says that she has been selling out of a number of positions in recent weeks. The manager expects a correction to hit equities in the short term because valuations have become a bit toppy.
“What we are always trying to do is to have perfect timing where we buy and sell at the perfect price and we are just not there yet,” she said. “We have had a lot of inflows which have also contributed to our cash weighting. However, after a period of market weakness like we saw in June, it was good to have a low amount of cash or be fully invested.”
“When markets have had a strong run like we have seen recently then it is a good idea to keep a bigger cash weighting. That’s why it is at 5 per cent at the moment. Last week it was at 0.5 per cent, but there are a few stocks we are in the process of selling.”
She adds that a number of initial public offerings (IPOs) on the horizon have added to her cautiousness, as has the fact that the government is selling down its stake in a number of businesses.
“What concerns me is the sheer number of IPOs at the moment. We have the likes of Foxtons and the placings of Direct Line and Lloyds,” Frikkee explained.
“When there are lots of sellers around, it makes me nervous. I much prefer to be holding back at times like this,” she added.
Frikkee says that though she currently holds a relatively large amount of cash in the portfolio, it can never be a long term strategy as “cash is paying her nothing.”
On top of that, though she believes the market may look a bit toppy, she does expect equities to continue to perform well over the long run.
“It feels as if the UK economy is improving in quite a broad sense,” she said.
While domestically focused companies have been an investors best bet recently, she says that as other areas of the world begin to stabilise, such as Europe, exporters will be set to benefit.
“By nature I am a cautious optimist - I will go outside but I will always take a brollie,” she explained.
“Europe is improving and that will have a positive impact as people will begin to spend a little more money. However, I think it is clear that this recovery is still very fragile so you cannot get carried away,” she added.
Frikkee was named manager of the Smith & Williamson UK Equity Income fund, joining Mark Swain, in July.
According to FE Analytics, over that short period of time the £9.2m fund has returned 8.95 per cent, which is more than both the IMA UK Equity Income sector and the FTSE All Share.
Performance of fund versus sector and index since July 2013
Source: FE Analytics
The fund has a yield of 4.33 per cent.
The manager is best known for running the £2bn Newton Higher Income fund between April 2004 and December last year. Her long term numbers have been disappointing on a relative basis; our data shows that the Newton fund was third quartile with her at the helm and underperformed against the All Share index.
However, the manager says she is looking forward to running a smaller amount of assets, which she believes will complement her style better than a multi-billion pound portfolio.
“It is a help of course running a tiny fund, but we would like to have a much bigger fund,” she explained. “If you are running a £2bn fund but you want to be investing in mid-caps, sometimes you can only have 75 to 100 basis points in the stock even if it is one of your best ideas.”
“We held 2 per cent of the fund in Invensys over the summer. When it got bid for, that position rose to 2.5 per cent in a day. It felt to us that the stock had got to a fair price and we were able to get out in 10 minutes, so running a smaller fund can make a difference,” she added.
Frikkee is pursuing a number of long-term themes in her fund.
For instance, her largest sector weighting is in life insurance stocks as she wants to benefit from an ageing population, and the increasing importance of pension planning and other retirement needs. She holds both L&G and Prudential in her fund, which Frikkee says offer both capital growth and income potential.
“We also like the travel and leisure sector, which is all very close to our hearts,” Frikkee said.
“It is a way to play the fact that people are becoming increasingly comfortable with the economy. Yes, the employment rate has stayed broadly the same, but the housing market is doing much better and because of that people are more willing to spend.”
“When people do start to spend, they spend on what I call experiences; whether it is on holidays or more meals out. Because of that we hold companies such as easyJet and the pub group Marstons,” she added.
The Smith & Williamson UK Equity Income fund has an ongoing charges figure (OCF) of 1.66 per cent and requires a minimum investment of £1,000.
