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Bill Mott’s triple vision

I have, over the last few months, noticed some carping over the performance of Bill Mott’s PSigma income fund.

Of course, the trouble of being thought of as an investment guru, as he surely is, is that people expect you to be 100 per cent right all the time. I am sure that Mr Mott would be the first to admit that he was too early into banks.

However, compared with some of his peers (just look at the bottom of the one-year performance table) his losses are modest, considering the significant headwind of being invested in banking stocks.

Nobody in the sector is having a good time at the moment and this includes some other superb managers and highly respected names – Tony Nutt and George Luckraft are just two examples.

It is far too early to consign to the dustbin such experienced and undoubtedly talented managers. In addition, the sector has started to lose some of its popularity with private clients, who would rather gamble their savings on the latest Livestock ETF Fund. Perhaps this is an echo of the tech boom?

I caught up with Bill Mott recently in London, where I found him to be rather enjoying the challenge of investing in these markets. After all, they are the most interesting and hard to predict that we have seen for many years. He believes there are currently some echoes of both the tech problems in 2000 and the ERM debacle of 1992 – more of which later.

He believes there are three main scenarios for the short-term future of the market that seem credible.

First, a global recession where defensive sectors such as pharmaceuticals, utilities and tobacco will thrive because they are relatively economically insensitive.

He is slightly overweight in all these sectors except tobacco, where he is modestly underweight. Unfortunately, there are not many hidden gems left.

The second scenario is the so-called decoupling view. This is that emerging markets will carry on doing well and offset the problems seen in the West.

However, this is looking increasingly unlikely and there is a big risk of disappointment if it proves to be unfounded.

There are, however, selected stocks that Mr Mott believes represent good value. He holds Standard Chartered, Prudential and some of the global engineering companies that are benefiting from growth in emerging markets.

One of the engineering firms is GKN, which, as one of the smaller global players, could well be a takeover target.

The third scenario is a realisation that domestic inflation is not a problem in the UK and we could be seeing the start of this process now. The main things going up in price are food and fuel. The Bank of England cannot influence these things through interest rates, so in time they may feel like they can cut rates to start boosting the economy without fear of causing much additional inflation.

Many stocks are currently being priced on the assumption that we will see a bad recession but they could bounce back strongly if the Bank of England start cutting rates. This is the view that I agree with most strongly myself.

In preparation for this third scenario taking place, Mr Mott has taken positions in select stocks that he believes could be poised for a recovery.

One is Kier Group, a construction and engineering firm that has been marked down alongside housebuilders but has plenty of cash on its balance sheet to see it through any slowdown in business.

Another favoured stock is Wolseley, which is being priced at a level that assumes that business will be slow forever but if sentiment lifts among investors, its share price could rebound.

The PSigma income fund portfolio is widely spread because there are so many possible scenarios and outcomes. At present, Mr Mott holds 90 stocks with an underlying net yield of 4 per cent.

One of the principal reasons that income funds have generally struggled over the last year is that mining companies have risen so strongly. These firms typically pay very low dividends and, as such, are not an appropriate place for a true income manager to invest much of their fund.

In this sense, it is like the technology boom towards the end of the last century, so perhaps, like then, it will eventually look a blessing that income managers have not been investing in this “hot” area.

At present, the majority of private investors seem to prefer emerging markets and commodities instead of good, old-fashioned core income funds.

Perhaps it is time to start redressing this balance and in my opinion the PSigma income fund would be an excellent place to begin.

Mark Dampier is head of research at Hargreaves Lansdown

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