While shares on my return from the US initially staged a recovery, it wasn’t too long before we had a dose of realism. There is uncertainty wherever you look at present. Can the eurozone cope with the pressures from the Pigs, or Piigs if you include Ireland with the southern European countries of Portugal, Italy, Greece and Spain? Are we on the brink of a double-dip recession? How would the UK cope with a hung Parliament?
These are all big questions to which there are no obvious answers. Doubt remains as to how individual countries, sectors and companies will fare in what remains the biggest economic shake-up in living memory. There are some even bigger concerns, such as can the capitalist ideal remain intact? We have all patted ourselves on the back for surviving the credit crunch but it’s not over yet by a long chalk.
The developing world has an aspiring population capable of creating a consuming middle class to sustain economic growth. The developed world has an aging population that is costly to maintain and likely to place a crippling burden on the state. The dynamics for the transference of economic power are compelling, even without the drag on the West brought about by the need to deleverage, both personally and nationally.
But it could still all end in tears. China and the other emerging powers are not without problems. Still dependent on Western consumption to fuel growth, their ability to contain inflation is, as yet, unclear. Against such uncertainty it is refreshing to learn PSigma’s Bill Mott has never had such a firm conviction over the future of his income fund as now.
It so happens Mark Dampier profiled this fund recently, so perhaps it will be of greater interest to focus on Bill’s more philosophical views as to what lies in store for investors.
The fund is run thematically and current themes assume a fairly anaemic recovery for UK plc. Indeed, 10 per cent of the offering is invested overseas – not the biggest vote of confidence in the UK market.
Yet Bill is convinced money can be made in the income sector, not least because uncertainty (that word, again) on the reliability of dividend payments will result in a rerating of firms enjoying an above-average yield capable of maintaining their dividend payouts. Given the poor returns available from cash and the question mark over sovereign debt, this seems a perfectly reasonable scenario.
It is not, of course, the only peg on which the strategy for this fund hangs and the approach is not far removed from that of Invesco Perpetual’s Neil Woodford. Defensive is prudent for the time being, in Bill’s view.
The future remains obscure, even if his conviction level is high. But when will dividends start to rise again, I asked Bill over lunch? His reply opened an avenue I had not previously considered.
Citing US petfood maker, Ralston, as an example, Bill opined that companies do not need growth prospects to attract investors. Ralston told him years before that US pet ownership is not growing and petfood consumption is static, so investment is not needed. Instead, cash can be returned to shareholders. There are plenty of businesses like that in the UK, he says, providing opportunities for income funds. With cash yields low, he might just have a point.
Brian Tora (brian.tora@ centaur.co.uk) is principal of the Tora Partnership