Strong income opportunities in the UK market has prompted Whitechurch Securities to add greater exposure to domestic equities and reduce some of its European allocation.
While last year the firm decided to underweight US equities in favour of European stocks, senior investment manager Tom Sayers said it has begun increasing its exposure to UK equities, with a particular focus on income.
Sayers said for income-hungry investors continuing and willing to take a contrarian stance, there are many opportunities to be had in the UK.
He said: “Our UK equity exposure is now about 30 per cent in our balanced portfolio, up from 21 per cent before.
“The average dividend yield across the FTSE 100 is around 4 per cent which, compared with other developed markets is very compelling.
“But with the UK markets we also have to acknowledge that Brexit will remain a drag for a period of time.”
Among their preferred UK areas, he mentioned the resources sectors, where they currently like certain oil businesses that are “much leaner, healthier and stronger”.
Total FTSE 100 dividend payments (£bn)
Source: AJ Bell
However, Sayers also noted caution needs to be taken, particularly around things like dividend cover – which measures a company’s ability to pay off its required dividend payments. Dividend cover should usually be higher than 1.5x with 2x generally accepted as the ideal level to offer a margin of safety.
“A lot of businesses at the moment are being priced to perfection in terms of being a crowded space for UK investors looking for dividend.”
“If you get caught on the wrong dividend side, that can be hugely detrimental in terms of share price,” Sayers explained. “Really if you are investing in the UK you need to look under the bonnet and make sure you are getting into areas which you are not going to get caught on the wrong side of one of these surprises.”
The Whitechurch investment manager said: “When you take the top 10 highest yielders in the FTSE 100 they would only have dividend cover of 1.4x and in the grand scheme of things you really need to be looking at dividend cover at a higher level than that for the dividend to be secure.”
He used BP as an example, a company that currently has a dividend cover of less than 0.99 times, notably lower than Royal Dutch Shell, which he said is “in a much better shape”.
While emphasising the importance of being careful when investing in the UK, Sayers said good opportunities can be found in the domestic market. 
“We are at a time when passives could stop bringing the upside we’ve become accustomed to,” Sayers said. “Stockpicking is going to become more relevant in bringing performance to the table.
“So we are seeing opportunities in the UK market but we are certainly very cautious on the area.”
“With the [current] strengthening of the sterling, some of the exporting businesses probably had a shot in the arm from the weak sterling and that recovery could be a bit of a problem.”
Whitechurch director Gavin Haynes (pictured) said its preference for managers with strong stockpicking credentials in the UK and its preference for income strategies has been reflected in its most recent allocations.
He explained: “We have been adding a bit of Schroders Income Maximiser. From the blue-chips we have added a new fund, Henry Dixon’s Man GLG UK Income.”
Performance of funds over 3yrs
Source: FE Analytics
The five FE Crown-rated Man GLG UK Income has been a solid performer under FE Alpha Manager Dixon, delivering a total return of 34.67 per cent over three years and a yield of 4.49 per cent.
The Schroder Income Maximiser meanwhile has delivered 18.2 per cent over three years, however, its covered call overlay leads it to sacrifice some growth in favour of higher income and, as such, has a yield of 6.99 per cent.
Another move within the portfolio is switch between two of FE Alpha Manager Neil Woodford’s funds.
Following outflows from Woodford Equity Income in recent months, Whitechurch has switched into the recently-launched Woodford Income Focus, which has the ability to invest more widely but retains a strong UK focus.
Sentiment towards UK equities has been negative since the EU referendum in June 2016, with global fund managers maintaining a large underweight position as Brexit negotiation continue.
“We don’t know how Brexit is going to be but we do think there is a very gloomy scenario priced into UK shares,” said Haynes. “Woodford Income Focus, whose key is to generate high income, is not a bad place to be at the moment.
“Woodford’s conviction hasn’t changed and he seems very focused in getting his performance back on track, what is what you want to see when you meet a manager.”
Performance of fund vs sector and benchmark
Source: FE Analytics
Haynes said UK policymakers remain supportive of markets, adding that he doesn’t foresee the Bank of England embarking a US-style rate-hiking programme. However, he said that the Federal Reserve’s programme has
“In the US, investors are cautious on the Fed rising rates too quickly, predicting seven by the end by 2020 which wouldn’t be very good for risk assets,” he said.
“We have made a move into US Treasuries recently as well but obviously in this rising rate environment we have to be cautious about the areas that we invest in.”
As such, the team said this year they are focusing on central bankers as there is much more visibility of the monetary authorities, particularly around the G4 central banks, which they said, “are telegraphing their intentions very clearly”.
“The Fed has been very good in the way they’ve showed what their intentions are so that investment markets aren’t disrupted,” said Sayers.
“It’s very much monetary policy in the views of inflation and all of those situations which is actually more of a threat to global markets and will create a more volatile environment in 2018.”
He added: “Obviously investing in a rising interest rate environment has its challenges. Risk-free trade in UK gilts is very much not in place at the moment, bringing a negative real return to the table.
“This is maybe making us identify other areas and getting some lower risk bond proxy exposure through some of the property funds.”