Following a 12.3 per cent gain in 2012 and a 20.81 per cent advance in 2013, investors have had a much tougher experience with UK equities so far in 2014.
According to FE Analytics, the FTSE All Share is down 1.36 per cent and – due to factors such as the end of QE in the US, worrying eurozone growth and the Ebola virus – the index has fallen more than 5 per cent since early September.
Performance of index in 2014
Source: FE Analytics
Though a number of experts have warned that volatility is likely to persist as the fears that spooked the market in the first place have not run their course, Clark – manager of the five crown-rated Fidelity Moneybuilder Dividend fund – thinks investors are making a huge mistake if they started to sell equities now.
“We had a very good year in 2013 with a 21 per cent return. That was a double-digit return which came on the back of a double-digit return the year before,” Clark (pictured) said.
“If we look back at 2014, we are much lower and I view that as a normal development after two very strong years. I don’t see the fact that we have seen a lacklustre development in the market this year as any indication about the future and I think it is very normal correction after the period we have been through.” While the manager admits that economic growth won’t be as strong as some analysts believe over the coming years, he still thinks that 2015 will be a much more enjoyable year for equity investors than 2014.
“This year has been a year of consolidation after two very good years. Well, more than very good years – two years of double-digit returns in the stock market,” Clark said.
“A year of consolidation was a natural development in those circumstances, but I see 2015 as a much better year. This is because the economy continues to recover – albeit slowly – and as the central bank authorities will be very slow to raise interest rates.”
“I think we can expect a much better year and a good return year in 2015 across the market.”
The major reason for that is because valuations are very attractive. In his presentation, Clark showed a graph of the cyclically adjusted P/E ratios – which is viewed as one of the most conservative measures of value – of the UK market relative to other developed markets, which is highlighted in the graph below.
Indices cyclically adjusted price/earnings since 1980
Source: Société Générale
“I think if you look at it objectively, the market still looks good value,” Clark said.
“What you can see is that the UK has consistently been on a discount to other markets and remains so at the moment. What is also true is that the UK’s valuation is much less than the last long-term market peak in the late 1990s and also in 2007.”
“This is a good sign.”
“The UK is cheap relative to both its history and other markets. I know there are some specific reasons for that, such as its large weighting towards commodity stocks which have a low P/E, but even allowing for that, valuations are attractive.”
The other major reason why Clark believes the recent sell-off isn’t a prelude to a more painful bear market is because there is a general lack of “mania” among company management teams, which is very good sign from an income investor’s standpoint.
“What is also good, particularly from our point of view, is that dividend pay-out ratios are still within a reasonable range,” he said.
“In the past, we have had periods where the dividends paid by UK companies have been too high, particularly during the early 1990s. However, we are miles away from that now. Companies have basically been run for cash after the crisis in 2008, by which I mean conservatively.”
“They have had reasonable capex budgets, modest amounts of acquisitions and so on, and I think that remains which is supportive for dividends.”
Clark has managed the five crown-rated Fidelity Moneybuilder Dividend fund since July 2008.
According to FE Analytics, it has been a top quartile performer in the IMA UK Equity Income sector over that time with returns of 77.26 per cent, beating its benchmark – the FTSE All Share – by more than 20 percentage points in the process.
Performance of fund versus sector and index since July 2008
Source: FE Analytics
The fund has tended to underperform in rising markets, as a result of Clark’s more defensive approach. It failed to beat the sector in the rising markets of 2012 and 2013, for example.
However, Clark has demonstrated an apt ability to defend his investors’ capital when market sentiment has been weak. His fund topped the sector in 2011 when the index fell 3 per cent with returns of 7 per cent and is currently top decile this year with returns of more than 2 per cent.
Fidelity Moneybuilder Dividend has also performed well from an income point of view.
Our data shows Clark has increased his dividend in each of the last four calendar years. Investors who bought £1,000 units in 2010 would have earned £36.53 in income that year, £37.74 in 2011, £41.27 in 2012 and £43.49 in 2013.
It currently yields 4.26 per cent and Clark favours mega-caps in his portfolio, with AstraZeneca, GlaxoSmithKline, Imperial Tobacco, Royal Dutch Shell and BP accounting for 25.7 per cent of his portfolio.
Fidelity Moneybuilder Dividend has an ongoing charges figure of 0.67 per cent.
