Asset allocation: Hargreaves targets equity income to beat market fears

WEB_070416_AssetAllocation_Image

Equity income is the sector to be in for Hargreaves Lansdown chief investment officer Lee Gardhouse despite market volatility, the looming EU referendum and recession fears.

He says: “Equity income is the most attractive part of the market, but we are not going through the end of the world and we’ll see more company profits growing next year.

“Sometimes equity markets aren’t as bad as people think and the UK market looks fine from a valuation perspective.”

The latest data from the Office for National Statistics indicates the UK economy ended 2015 with a better-than-estimated outlook.

GDP figures show the country grew by 0.6 per cent in the fourth quarter of 2015 instead of the 0.5 per cent reported last month.

However, many UK equity investors have started to weigh the possible outcomes of a Brexit scenario amid concerns a vote to leave the EU will damage growth.

Gardhouse is unperturbed, however, arguing investors should not put too much weight on the implications of the 23 June referendum.

Gardhouse’s Multi-Manager High Income fund, which he is to co-manage with Ellen Powley and will be launched next week, has a 60 per cent exposure to equities, with 71 per cent of this allocated to UK-focused funds.

He says: “The UK has got an exceptional record of high yield compared with other markets. It has a unique culture of good dividends, with the majority of companies paying a high level of profits in the form of dividends.”

Despite headlines suggesting banks and some big names in the pharmaceutical sector will cut their dividends next year, more than a quarter of FTSE 100 companies have grown dividends 10 years in a row, according to research from AJ Bell.

Gardhouse says: “We aim to find very skilled managers in a particular area. We have gone with managers that have done very well but we are not going for a maximum yield and we stayed away from the more esoteric markets.”

While the UK is Gardhouse’s favourite market for equity income investing, the fund has 10 per cent in the US, 12 per cent in Asia Pacific, 6 per cent in Europe and 1 per cent in Japan.

He says: “The US is much more growth-oriented than income-oriented while in Asia, although companies are focusing more on dividends, there is less of a commitment [than in other regions].

“In Europe there is more of a culture of receiving income from bonds than equities.”

The fund, which does not invest directly in assets, has 14 holdings, which Gardhouse considers a “reasonably concentrated” strategy.

Gardhouse also manages Hargreave’s Multi-Manager Income and Growth fund, the Equity and Bond trust with David Smith, and the Special Situation trust with Roger Clark.

The High Income fund is expected to reach a yield of 4.5 per cent which “could be stretched to a bigger number”, says Gardhouse.

He says: “We did some research and we discovered only a few people have the proper information on yield on their funds. We spend a lot of time looking for funds that actually have that information.”

The newly-launched fund will cover the small and mid-cap sector through the Marlborough Multi Cap Income, which has “one of the best track records since its launch in 2011”.

Gardhouse also likes the JO Hambro Capital Management UK Equity Income fund “for its contrarian views”. He says: “The fund looks at areas other people don’t, such as oil and mining, and over time this strategy has proved successful. We’ve been invested in this fund since its launch in 2004.”

He has also picked smaller funds, including two Artemis offerings: global equity income and high income.

Bonds represent 40 per cent of the portfolio and include a blend of fixed income products, with high yield being its largest holding at 56 per cent. Government bonds and emerging market bonds are the lowest allocation at 6 per cent and 2 per cent respectively.

Gardhouse says: “We don’t like government bonds, they don’t have attractive yields and currently they are at historically low levels. Instead we prefer corporate bonds and high yield to generate income.”

He says generating an attractive income from savings and investments in the current market environment of ultra-low interest rates is “a real challenge”. He says: “We have approached our fund the same way an individual would approach it. So we questioned how we will achieve that income. Twenty years ago you could say ‘I need income, and I am not taking a lot of risks’. That was easy at that point but today we have bigger risks.”

In contrast with most income funds, which pay quarterly or bi-annually, dividends will be paid monthly.

It is expected to appeal to pension and Isa investors who need a sustainable income. Up until its launch date units will be sold at a fixed price of £1.

WEB_070416_AssetAllocation_Graph