The manager of the £81m Equity Income fund is avoiding so-called “defensive areas” as a result, citing these companies’ exposure to emerging markets as another reason to be wary.
“We are very underweight consumer goods, which includes tobacco, food and drinks producers. We don't hold Diageo, Unilever or SAB Miller,” he explained.
“For the past few years they have been bond-proxy companies. They are the stocks that have been bought for their bond-like characteristics in a falling bond yield environment, so they will be sold when bond yields are rising again – something that will happen over the next few years, gradually.”
“They are great companies but they are just too expensive.”
Performance of stocks over 3yrs
Source: FE Analytics
Diageo, Unilever and SAB Miller have all performed well over three years, with returns in excess of the FTSE 100's. However, Message thinks these companies have their best days behind them for now and will come under significant selling pressure as rates rise.
All three companies have significant exposure to emerging markets, which the manager is generally avoiding in his fund.
“We have low exposure to mega caps at the moment in general because they are very internationally focused and we want more of a domestic bias,” he said.
“In the short-term, emerging markets shares will have a bounce because it’s just so consensual to hate them, but on an 18-month or two-year view, I don't really want to be in them.”
“The lower-tier rates of growth will be more attractive in the developed economies,” he added.
“We like the US, UK and Europe but we are less favourable about anywhere else over the next few years.”
Consumer staples such as Unilever, Diageo and SAB Miller were some of the worst-hit stocks during the January emerging markets sell-off.
According to FE Analytics, all three have lost more than the FTSE 100 average in 2014. Diageo was the worst hit, down 10.09 per cent.
Performance of stocks in 2014
Source: FE Analytics
A number of fund managers have also recently voiced concerns about the outlook for some of the UK’s largest multinational consumer staples companies.
FE Alpha Manager Mark Costar, who runs the JOHCM UK Growth fund, is actively avoiding the likes of Unilever and Diageo, for example. He says investors have been piling into these stocks because they wrongly believe that such companies will continue to perform well no matter how the general economy is doing.
Costar argues these companies are coming to the end of the cycle and are facing competition from their emerging market rivals.
While not disclosing the names of the companies for compliance reasons, both Henderson’s Luke Newman and Cazenove's John Warren are currently shorting some of the UK’s big consumer goods stocks that derive a large proportion of their earnings from the developing world.
Performance of fund vs sector and benchmark since Dec 2009
Source: FE Analytics
Message has managed the Old Mutual Equity Income fund since December 2009. The fund has outperformed its sector and benchmark over this period, returning 78.01 per cent in the process.