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Man on a wire


Colin Morton joined Rensburg in 1988 and remains part of the group’s successful Leeds-based UK equity team, running income and blue-chip mandates.

Like many high-profile managers, he remains cautious on the UK economy and therefore struggled in performance last year through refusing to buy rallying highly leveraged stocks.

“In general, I remain downbeat on the UK economy for the next four or five years. There has been substantial stimulus in the form of low interest rates and quantitative easing but the serious problems remain unaddressed,” he said.

Morton looks at the economy as he would a company, with the income side represented by the private sector and costs by the public sector.

He said: “What the Government needs to do is reduce debt and costs, which is what many companies have had to do to survive in the private sector. It is hard to see how the Government’s cost side in the form of the public sector remains untouched and there may have to be job losses.”

Morton compares the current economic situation with walking a tightrope and sees a danger of things spiralling out of control, especially if a sterling crisis emerges or foreign investors lose faith in the UK.

“The risk now is what happens if interest rates need to go up to protect the currency,” he added. “People have also got used to lower variable mortgage rates again but that looks unsustainable in the medium term, creating problems when they go up. The key question is whether the economy is strong enough to stand on its own when the stimulus is withdrawn.”

Against this background, Morton believes it will be more difficult for the market to continue its recent run, highlighting a yield of around 2.5 per cent if you strip out a few mega caps.

His portfolio remains overweight defensive blue-chip areas including pharmaceuticals and tobacco, and underweight any cyclical sectors reliant on economic strength.

He sees the market as much less cheap than it was, with current valuations pricing in a sustainable economic recovery that is yet to occur.

As cost-cutting has fuelled the recent bounce – with most companies turning over less in 2009 than the previous year – Morton feels that top-line growth must come through to form the next leg of recovery.

“Before the rally, the yield on the market was almost 6 per cent against 3 per cent on 10-year bonds, offering a great opportunity for long-term investors to buy quality companies cheaply,” he added.

“This situation has now completely reversed for many stocks with equity yields substantially below both their own quoted debt and gilts.”

That said, Morton still notes several well financed quality businesses where yields are equivalent or higher than their own debt and government paper, highlighting BAT, Scottish & Southern Energy and GlaxoSmithKline.

On the dividend situation, he is among those claiming the worst of cuts is now behind us after a very difficult 2009 although predicts steady rather than stunning growth this year.

“It is encouraging that companies are returning to the dividend list but most are unlikely to be aggressive on this front in the face of an uncertain outlook,” he said.

In contrast, Morton highlights a stock like British American Tobacco, which still yields around 4.75 per cent and has continually been able to increase its dividend. This company is a strong example of the blue chip with overseas earnings’ story he currently favours, boasting a product that gives strong sustainability of cashflow.

“BAT has been able to keep increasing its prices above inflation and as smoking continues to grow across the world, this business is extremely cash-generative, he said.

“The company is not seeking aggressive growth in areas like Capex so is able to return much of its cash to shareholders in the form of dividends.”

Pharmaceuticals are another favoured area, with strong yields and demographics plus balance sheets stronger than most of the market.
As an income manager, Morton faces the dilemma of little dividend available from the UK-focused banks and only has positions in the Asian pair of HSBC and Standard Chartered.

He is even underweight in those, believing the political and public view on the whole sector has soured and the far more sensible Asian players could still suffer from stringent capital requirements.


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