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Mark Dampier: PSigma Income should benefit from Miton merger

Changes in the PSigma Income team could be key to the fund’s long-promised high performance

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I have known PSigma Income manager Bill Mott as long as I have known Neil Woodford and have supported him for a similar length of time. When he launched the PSigma Income fund in 2007 it was natural for me to suggest it was a good choice for income and growth investors. Unfortunately, performance has not lived up to expectations.

It has not helped that the fund launched at the peak of the stock market in 2007. Some initial holdings in the banks also did not help, although to be fair to Mott he soon changed this.

His views on the wider economy have tended to chime with Woodford’s. They have both been wary and far from convinced that we have fully recovered from the excesses of the early and mid-2000s. As such, they have both preferred to invest in larger, more defensive companies, which tend to be less reliant on strong economic growth for success. 

With hindsight, it is plain to see small and medium-sized high-yield companies were the best areas in which to invest.

Last year PSigma merged with Miton Investment Managers. This has brought some changes to the fund and the structure of the team managing it. Many investors question my continued faith in Mott, but I believe these changes will be positive for the fund and I am not ready to write it off yet.

Gervais Williams, a highly successful small and medium-sized company fund manager, will support Mott on a day-to-day basis. While not directly involved with this fund, the emerging talent of George Godber also adds strength to the wider team. 

This structure should bring forward better stock ideas to complement Mott’s underlying, and usually correct, economic views.

The influence of Williams is already being felt. He added Quindell, a consulting, software and outsourcing specialist, to the portfolio, and initial results are encouraging. It is one of Williams’ top stocks from his other funds, and while it is currently quoted on Aim, it is expected to step up to the FTSE 250 index in due course.

It is important to realise the fund is not going to become small and mid-cap oriented. It is expected to have 10 per cent to 15 per cent exposure to this area, with the team aiming to identify some companies that have the potential to be tomorrow’s winners from an early stage.

Elsewhere, Mott continues to focus on the pharmaceutical and biotechnology theme, where about 20 per cent of the fund is invested. He remains convinced these sectors will “embark on a multi-year opportunity”. Key holdings are GlaxoSmithKline and AstraZeneca in the UK; and Novartis, Roche and Bristol-Myers Squibb overseas.

The biotech theme is being played through BB Biotech, a Swiss investment company. It is managed by ex-Roche representatives and is yielding 5 per cent. It invests in other biotech stocks and has allowed Mott access to the firm’s industry research.

Overall, the team ask themselves five simple questions: What are the prospects for a rise in turnover? Can corporate margins be sustained? Is the management team good enough? How much financial headroom is there in the balance sheet? Are there low expectations in the share price?

This system, adapted by Williams, helps give the team an objective view on each company. Examples of it working in action include SSE, which has a balance sheet that looks worse than first appears; and food retailers such as Tesco and Sainsbury’s, which are losing market share to discounters such as Aldi and Lidl. These positions have been sold.

New additions to the fund have included Royal Mail, which is debt free. The team see opportunities for rising income and growth in the parcel side of the business. Stobart Group has also been added as they see improving asset values and cashflow, which should lead to a rising dividend.

I was encouraged after a recent conference call by what I felt was much greater confidence from the whole team. I believe better ideas are coming through, and I also think their bias to larger companies might begin to pay off over the next few years as this area is beginning to look good value relative to smaller and medium-sized companies which have had such a good run recently.

Mark Dampier is head of research at Hargreaves Lansdown

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