He concedes the reduction in the number of holdings in the fund last year failed to benefit the fund’s performance.
“It [the reduced number of stocks] has not been beneficial. Another time it would have been, but the swings between sectors have been so rapid they would have been better off owning an index fund [with a higher number of stocks].”
Brough decided to trim holdings from 90 to 75 at the end of August 2007 to manage the growing assets in the fund, indicating greater conviction in fewer holdings.
Over the past year, the fund has returned a loss of 29.22% compared with the FTSE Mid 250 fall of 23.79%, according to Morningstar.
However, performance has picked up this year, Brough says, as income fund managers who traditionally invest in large-caps have found themselves looking at mid-caps for yield.
“The income bubble is really interesting me now. There are two stocks, BP and Shell, which account for 25% of the FTSE 100’s dividend income.”
He adds that income fund managers, the “major recipients of new money”, have recognised that despite high yield from these stocks, it is a risky strategy for many managers to rely on two companies for a large proportion of their income. Meanwhile, 10 stocks account for 65% of the index’s dividend income, and these are concentrated in the oil, utilities and tobacco sectors.
“Income funds have been drilling down into the Mid 250 index where there are companies yielding 4% to 6% and they are getting a much better spread of sectors,” says Brough. He points out that the largest stock in the Mid 250 represents 1.5% of the dividend income for the index.
The boost in performance of the UK Mid 250 fund this year is because mid-caps are in “pretty good shape” and managers are not inundated with rights issues, Brough says.
He is backing recovery stocks that are sensitive to the consumer, which he says are improving dramatically. Research from Cazenove shows the level of income available for discretionary spending will be up 20.1% in 2009 with another 6.3% for those who are in work, have a mortgage and a car.
“I accept that in the short-term people will save a lot of this, but as consumer balance sheets grow, they will gain confidence,” he says.
Brough says he prefers to invest in business areas with strong fundamentals, and says companies that are highly indebted will see a strong recovery, with more opportunities through re-financing on the way.
At the beginning of the year, when the fund was down 10%, he predicted it would return a positive figure this year, and Brough says he stands by this forecast.
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