More than one-quarter of FE Trustnet readers have no confidence in the outlook for UK equities, a recent survey found, causing potential problems in how to take exposure to the domestic market.
Yesterday morning FE Trustnet took a closer look at last week’s poll results, which show that 37 per cent of our readers are “neutral” towards UK equities while 29 per cent are “somewhat confident”.
A further 26 per cent are “not at all confident” on the market area and only 8 per cent are “extremely bullish”.
This is perhaps understandable given Brexit-related uncertainty and the impending US election, which could see sterling either weaken or strengthen against the US dollar.
After providing fund picks for those who are bullish on the UK, the same selection of industry professionals talks through options for those taking a more defensive approach to the market.
Ben Willis, head of research at Whitechurch Securities, says “rising star” Hugh Yarrow’s (pictured) five FE Crown-rated Evenlode Income fund could be well suited to defensive UK equity investors. 
“Yarrow employs a strict investment process and philosophy, which involves four core objectives: growing dividends, cash compounders, index outperformance, and lower volatility than his peers,” he explained.
“Yarrow will not chase a high yield which could compromise his investment style and so the fund has fallen out of the UK equity income sector into the IA UK All Companies sector.
“However, the fund has consistently yielded in excess of 3 per cent. Unsurprisingly, the fund has had a distinct bias towards long duration equity assets and consumer staples, with names such as Unilever and Diageo being perennial top 10 positions.”
Since Yarrow launched the fund in 2009, it has returned 143.99 per cent, outperforming its sector average and the average peer in the IA UK Equity Income sector (which it is benchmarked against) by 62.07 and 56.97 percentage points respectively.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
In terms of its risk metrics over this time frame, the £1bn fund is in the top decile for its maximum drawdown (which measures the most lost if bought and sold at the worst possible times), its downside risk (which predicts a fund’s susceptibility to losing money during down markets) and its annualised volatility.
The fund consists of 39 stocks and has an active share of 77.28 per cent. It currently has 62 per cent in large-caps, 32.4 per cent in mid-caps, 2 per cent in small-caps and 3.6 per cent held in cash.
Evenlode Income has a clean ongoing charges figure (OCF) of 0.95 per cent and yields 3.5 per cent.
Tom Jemmett, fund analyst at Brewin Dolphin, says the £369.5m RWC Enhanced Income fund has drawn the attention of both defensive equity and high yield investors recently.
“The strategy has developed into a fund with a defensive profile delivering a superior yield to the market by investing in UK high quality cash compounders trading at attractive valuations,” he said.
“The team adopts an option overlay strategy which seeks to enhance the overall income of the portfolio through writing call options, however this can serve to dilute participation in a strong market rally and indeed this is reflected in the performance post the global financial crisis.
“One of the team’s unique characteristics is their willingness to hold relatively large cash positions and signifies the valuation concerns the team have.”
While this has weighed on performance over recent years, Jemmett reasons that it will protect capital during times of market weakness and has optionality when it comes to finding opportunities when valuations look more attractive – its cash weighting currently stands at 23.6 per cent.
Since the fund was launched by co-managers John Teahan, Ian Lance and Nick Purves in 2010, it has returned 26.78 per cent, which is a relative underperformance versus its FTSE All Share benchmark of 24.78 percentage points.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
However, it has a maximum drawdown of 12.19 per cent and a downside risk ratio of 7.86 per cent, compared to the All Share’s 14.5 per cent drawdown and 11.6 per cent downside risk ratio.
The fund has a concentrated portfolio of 26 stocks which are chosen based on both their strength and their low valuations, in order to deliver investors a constant annual yield of 7 per cent. Examples of the fund’s largest holdings include GlaxoSmithKline, Unilever and RELX.
It has a clean OCF of 1.11 per cent and its historic yield is on target at 7 per cent.
Fidelity Moneybuilder Dividend
Informed Choice’s Martin Bamford says Michael Clark’s five crown-rated Fidelity Moneybuilder Dividend fund could be a good option for cautious investors.
“The portfolio has a bias towards larger stocks and is known to take a cautious approach towards UK income investing,” he said.
“The companies in the portfolio are chosen for their predictable cash flow and strong balance sheets, with a reliable history of dividend payment. The fund is well diversified, with over 70 holdings, and has a consistent performance track record.”
The £1.1bn fund has been headed up by Clark since July 2008 and, over this time frame, it has returned 110.67 per cent compared to its sector average’s return of 86.93 per cent and its benchmark’s return of 76.37 per cent.
Performance of fund vs sector and benchmark under Clark
Source: FE Analytics
Given the manager’s bias towards larger, defensive companies, it has a top-decile downside risk of 11.91 per cent and a maximum drawdown of 21.22 per cent over this time frame. This is compared to its sector average’s downside risk of 13.68 per cent and maximum drawdown of 27.57 per cent.
Examples of the funds’ largest overweights relative to the FTSE All Share include Imperial Brands, Altria Group and AstraZeneca.
Fidelity Moneybuilder Dividend has a clean OCF of 0.67 per cent and yields 4.36 per cent.
The final fund on the list was actually chosen as more of a bullish play in yesterday’s article due to its highly concentrated portfolio and its focus on undervalued assets.
Tilney Bestinvest’s Jason Hollands, however, says the fund could be a good play for the more defensive investor.
“John Wood runs a concentrated, unconstrained portfolio of 25 high quality growth companies but he is acutely aware of protecting capital and regularly heads his monthly commentaries with Warren Buffet’s maxim ‘Rule No 1 Don’t lose money, Rule No 2 don’t forget Rule No 1’,” he said.
“He’s been very concerned about the markets being distorted by money printing by central banks for some time and has been holding a considerable portion of the portfolio in cash – now as high as 20.7 per cent.
“That will protect on the downside if markets correct and also leave him in a good position to start buying shares again as and when he sees value return to the markets.”
FE Alpha Manager Wood has a concentrated portfolio of 25 stocks, with its top three holdings – RELX, National Grid and British American Tobacco – accounting for 15.6 per cent of the fund’s AUM.
Since the fund’s launch in 2005, it has returned 164 per cent compared to its benchmark’s return of 95.14 per cent and its sector average’s return of 91.87 per cent.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
In terms of its risk metrics, it is in the top decile for its maximum drawdown, annualised volatility and downside risk over the same time frame.
JOHCM UK Opportunities has a clean OCF of 0.81 per cent and yields 2.79 per cent.