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Fund managers tell investors to take the income option

Fund managers have advised investors to focus on income strategies in 2011 as economic uncertainty means growth will be difficult, although many say developed equity valuations remain attractive.

In outlooks for the year, they say income strategies will deliver, although one high-profile fund manager accuses rivals of “thinly veiled” self-promotion in their statements.

James Harries, who runs the £1.4bn Newton global higher-income fund, warns that developed world equities will be volatile as consumers remain under pressure “despite the efforts of the authorities to stimulate demand”. He says equities that pay income will perform. He adds: “Conservatively managed businesses, often highlighted by a dividend policy that is given its rightful emphasis, will attract a premium valuation.”

Standard Life Investments head of global strategy Andrew Milligan says economic issues “could result in even more turbulence in financial markets in 2011 than seen in 2010”. He adds: “A major risk would be a further employment or income shock, say from a spike in oil prices.”

Milligan also believes that investors should focus on income strategies. He says: “Strong corporate cashflow means investors can still find many income and yield opportunities.”

Neptune’s £7.3m UK special situations fund manager Alex Breese says UK equities are displaying solid fundamentals.

He says: “The UK market should make further progress in 2011, backed by attractive valuations, sound balance sheets and modest earnings growth.”

Ignis’s £37m global growth fund manager James Smith says: “Equities are the place to be in 2011. Earnings growth is good and companies are well placed to increase dividends. UK and European equities are trading at bargain valuations. Japan, finally seeing earnings upgrades, also looks attractive.”

Ignis’s £283m corporate bond fund manager Chris Bowie says: “Corporate bonds outperformed pretty much everything in 2010 and I think they will again in 2011.”

But one veteran fund manager, RWC Partners equity income manager Ian Lance, brands outlook statements “thinly veiled attempts by fund managers to puff their own asset class in order to sell their product”. Lance, who left Schroders in May with co-manager Nick Purves to launch an equity income franchise at RWC, says the idea a fund manager can predict where markets will be in a year is “questionable”.

“Conservatively managed businesses, often highlighted by a dividend policy that is given its rightful emphasis, will attract a premium valuation”

He says: “The typical equity outlook at the moment describes valuations as attractive, which they are if one is content to lean heavily on a one-year forward price-earnings ratio based on cyclically high profits. The below-average dividend yield and above-average Shiller p/e on most equity markets tell a different story, however. Unfortunately, it is extremely rare to find a fund manager willing to have a negative outlook on his or her own asset class.”

Several fund managers began voicing concerns about bonds in December. Jupiter chief investment officer John Chatfeild-Roberts warned bond investors the potential for further gains in the asset class look limited.

He says while government bonds have attracted major assets, further gains are likely to be smaller, given that interest rates will remain low, while the risks associated with holding these assets are increasing.

He also believes investment-grade corporate bonds look less attractive, claiming while companies may be in good shape, they remain vulnerable to increases in government bond yields.

The Bank of England recently published a stability report warning of a 1994-style bond crisis as yields have hit such low levels.

The world’s biggest bond investment firm Pimco is considering introducing equity-linked securities into its funds.

Aegon Asset Management’s £309m high-yield bond fund manager Phil Milburn says government bonds actually devalued towards the end of the year, with yields rising by about 100 basis points.

He says: “Government bonds have been expensive. Does that mean there is a bubble? No. People need to get a grip and deal with the cause rather than the symptoms and the cause is that interest rates are very, very low.”

Investment Management Association chief executive Richard Saunders says 2011 comes with some regulatory unknowns for investment firms. He says: “The legislation which will shape the financial services industry of the future largely comes from Brussels, with many more pieces of legislation in the pipeline for next year.

“If the FSA is not going to modify its current RDR proposals, it will need to watch developments in the market with the utmost care and be ready to step in if they are not moving in the intended direction.”

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