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Mott’s landing

Anyone who bought PSigma income at launch in April 2007 might ask why I am featuring this fund again, considering it has never risen above its original offer price. It is a fair question and one I am happy to answer.

High yield equities have been out of favour for the past five or six years, so fund manager Bill Mott has been swimming against the tide. To be fair, his original decision to invest in the banks was wrong – a point he would acknowledge – but I simply cannot write off his excellent long-term track record.

Frustratingly, since the launch of the fund, his macroeconomic view has been almost completely correct. He was among the first to call a significant drop in interest rates and he also predicted a long, grinding recovery from the financial crisis.

I found Mott supremely confident on the outlook for his fund when I met him recently. He considers the likelihood of policy errors from politicians and central bankers to be higher than at any point during his career. He also notes that, despite the financial crisis, there has been no rebalancing of the global economy.

He puts the chances of the UK suffering a prolonged period of subnormal growth, by which he means at least five or possibly 10 years, at 60 per cent. This environment could be good for high-yielding equities.

A low interest-rate environment favours companies that can continue to pay and increase their dividends. These are represented in his portfolio by companies such as Vodafone, GlaxoSmithKline and Shell.

Each accounts for around 6 per cent of the fund and they currently offer 2.5 times the yield available on Government bonds – surely indicative of some value. Furthermore, a 40 per cent re-rating would still not leave them looking particularly expensive.

There is always the risk of a black-swan event – a significant occurrence that is virtually impossible to predict. A deflationary spiral, similar to that seen in Japan, would be an example. Even this would not necessarily be that bad for highyield equities, providing the companies held have pricing power.

Mr Mott also sees a 20 per cent chance of inflation being pushed higher by the actions of central banks. Again, this is mainly a threat for businesses that can not pass cost increases on to the consumer.

Mott’s views chime with those of equity income peer Neil Woodford. He remains positive on pharmaceuticals, both in the UK and oversees, diversifying into companies such as Novartis, Roche, Bristol-Myers Squibb and Johnson & Johnson.

He believes global pharmaceuticals are as underpriced as tobacco companies were 10 years ago. They are pricing in no biological innovation in our lifetimes, only technological advancements. His conviction is backed with an 18 per cent position in this sector.

I have seen some of the worst stockmarket volatility of my life over the past few weeks. Daily swings of 1 or 2 per cent have not been uncommon. Some certainty and predictability would be welcomed by most investors but the dark cloud of eurozone sovereign debt remains on the horizon.

Investment is being turned on its head – Government bonds, traditionally a benchmark for the risk-free rate of return, are barely yielding 2 per cent, while GlaxoSmithKline-type stocks offer a big yield premium.

I still believe the eurozone crisis will come to a head quite soon. Any substantial fall in the stockmarket would make this fund one of my first choices. Meantime, I watch in amazement at the antics of European politicians who seem in complete denial, or perhaps despair, at what is going on. This is strange considering the single currency was their creation and it is through irresponsible, no-strings-attached lending to countries such as Greece that has brought the problems home.

A stark reminder that some very clever people were the originators of this plan and sometimes the ideas of the most intelligent people in the world warrant the most scepticism.

Mark Dampier is head of research at Hargreaves Lansdown


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