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Whittaker’s almanac

One area where New Star has not been firing on all cylinders has been equity income. This must be particularly frustrating for the group, considering how much money the sector has attracted in recent years.

Toby Thompson’s higher-income fund has continued to pay higher dividends but performance, although hardly a disaster, has been nothing to write home about. The sector is still dominated by the big four – Adrian Frost, Tony Nutt, Neil Woodford and George Luckraft.

It will have been especially frustrating for Mr Thompson that he made absolutely the correct macro call on the UK economy, yet one of his big areas – banks – have been de-rated despite strong dividend growth and little evidence that bad debts are a problem.

He has new competition now that Stephen Whittaker has taken over the New Star equity income fund from Tim Bray.

It may seem rather strange that a growth manager would want to take on an income mandate but Mr Whittaker is a natural fit for an income fund as his is very much a value style. Indeed, his growth fund yields close to the market average anyway.

He sees this fund as a relatively old-fashioned equity income fund looking to provide high and rising income and he is optimistic on dividend growth.

This is an area which many IFAs do not concentrate on, possibly because many clients reinvest dividends, but believe that as the baby boomers begin to retire, they will want to switch on the income tap. I believe that dividend growth will become increasingly important over the next 10 to 20 years.

Mr Whittaker believes dividends are generally relatively safe, citing the 1990s’ recession where most companies maintained dividends in spite of a very bad recession.

He will not, however, look to buy a below market yield even if it has strong dividend growth prospects. The companies he is looking for must yield at least the same as the market. However, unlike some equity income managers, he will not necessarily sell a company if the yield falls below the market average as he sees a new range of investors coming in wanting to buy the stock, which may propel the share price higher.
There is around 40 per cent difference to that of the growth fund. There are no telecoms in his growth fund but in the equity income fund he will hold BT and Vodafone.
He has a slightly bigger weighting in banks and life insurance and also held Gallagher, the tobacco company which was recently taken over.
Like his colleague, Mr Thompson he is also optimistic on the UK economy. He has felt that way ever since he joined New Star. He likes retailers such as HMV, Dixons and Kingfisher (all unpopular stocks) because he believes that retail franchises are the easiest ones to turn round. Many see HMV struggling in the face of music downloading but he foresees its potential as a meeting place for young people by integrating coffee shops and broadening the appeal to selling things such as iPods. He notes that Brandes, the fund management company, has been a big buyer of HMV recently and this is a company you might remember which bought Marks & Spencer when many had written it off.
Mr Whittaker sees the fund as effectively in direct competition with Mr Thompson since the funds will not be differentiated in any particular way. He believes his ability lies in identifying change and understanding the catalysts. For example, he expects a re-rating in banks because things are not nearly as bad as everyone assumes. He sees banks as being in a similar position to housebuilders a few years ago. The economy is far more stable and therefore debt is not such a problem. Cashflow yields are high and this gives every incentive for bigger distributions.
As always with Mr Whittaker, you know you will get a highly committed and confident fund manager. I did not ask him about his old colleague Neil Woodford but I suspect that, given his competitive nature, he would dearly love to take on the Woodford franchise (so to speak).
Note that the early signs are good. Since taking over the fund, he has propelled it right up the sector table.
The UK equity income sector is competitive, but does not offer as much choice as many investors believe. This is a fund that I would look to challenge for the top positions over the next few years and it is definitely one to look out for.

Mark Dampier is head of research at Hargreaves Lansdown.


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