Aviva’s Chris Murphy has been using the recent market crash to pick up battered financials which he says have been victims of investors’ “fear and greed” – but is drawing the line at the banks.
The manager of the £854m Aviva UK Listed Equity Income fund looks upon each potential holding in absolute terms, meaning he focuses on whether it has a good, sustainable business model and can grow capital and dividends over the long term.
However, another important part of his strategy involves working out a fair price for each company, which means he may take money out of a quality business if he sees better relative value elsewhere.
This is what has led him to sell stocks such as educational publisher Relx and supermarket Tesco, which held up well in March’s crash, and buy financials such as insurer Prudential and asset manager Schroders instead.
Performance of equities in 2020
Source: FE Analytics
“We think the share price reactions on some of the financial services businesses have been overdone,” he explained.
“You still need life cover, you still need insurance, and in the long run you will still need investment products. But they've been hit in the short run – particularly the story with Pru in Asia.”
Murphy is keen to point out this is not a pure value play – the stocks he has bought since March’s crash are either positions he had previously held in smaller amounts or companies he has had his eye on for some time.
The manager said there is every chance that the pandemic will drag on for some time and there are still plenty of unknowns, such as whether you can catch Covid-19 more than once and how long it will take to develop a vaccine. As a result, he is not looking at companies that have the potential to shoot the lights out if they defy expectations and survive, but those with solid fundamentals that have been unfairly hit.
“In previous crises, people still went to the pub and the cinema, which is why this shutdown is unprecedented,” he continued.
“It's the pace and speed of this that is really very different. Businesses that would be perfectly fine in a normal slowdown are in trouble because all of a sudden, if you want to buy some things, you can't.
“But then the flip-side of the old mantra of fear and greed is that with some companies, people are just panicking.
“The Pru collapsed, then it rallied a bit, but people were just panicking. And actually, what this revealed to a lot of Asia is that life insurance, financial protection and so on are going to be even more important. So actually, the drivers in the long run of that business could accelerate.”
Yet while Murphy is optimistic about the prospects for financials as a whole, he is avoiding the banks. The manager said their crucial role in keeping the economy afloat means governments will expect them to put the interests of shareholders on the backburner – and they will be in no position to argue.
“I personally feel that because of the nature of this, regulators and government expect banks to be in a position to use their balance sheets to support companies and the economy,” he continued.
“Hence why there was political pressure on the banks to not pay dividends. In the end, governments and the consumer bailed out the banks in the financial crisis and I think now it is time for banks to put their balance sheets to work to support companies and not foreclose on small businesses or even big businesses early. This is such a shock to the system that, you know, you can't penalise businesses.”
The coronavirus-related economic shutdown has put severe pressure on dividends. Link Group said the UK’s dividend pool could be halved this year while the Investment Association has suspended yield guidelines for the IA UK Equity Income and IA Global Equity Income sectors.
Yet while Murphy’s fund is primarily an income product, he is supporting those holdings that are withholding or deferring their dividends, even if there is no immediate threat to the business.
“The key thing is that the companies survive,” he added. “For example, Ultra Electronics which is a defensive business is largely unaffected, but it effectively deferred a dividend which it will pay later on. I think we will see a lot of that.
“The main thing is to make sure the capital side of the portfolio is looked after and when we do come out the other side of this we capture as much upside as possible, without changing the risks or the parameters of the types of businesses we invest in.
“Because if you get that right, the income will look after itself once you get into a more normal world.”
Aviva UK Listed Equity Income has made 79.3 per cent over the past decade, compared with gains of 59.98 per cent from the FTSE All Share and 59.14 per cent from the IA UK Equity Income sector.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
It is yielding 5.2 per cent and has ongoing charges of 0.81 per cent.