Click & Close Ads
Click & Close Ads
A range of dividend-focused UK blue chips are likely to be ‘in for a bit of a kicking’ as UK interest rates rise, Citywire AAA-rated Majedie UK Income +
manager Chris Reid has warned.
Highly rated consumer staples, pharmaceuticals and the oil and gas sector would bear the brunt of a rising rates, which would send bond yields higher and prompt rebalancing among some investors, who could jettison some of the their dividend-paying stocks for fixed income, he said.
‘I have been around for 16 years and invested through both tightening and easing and would welcome it,’ said Reid, who runs more than £1 billion in various portfolios.
‘If rates rise because growth is picking up then that would be a reason for cheer. [But] there are a lot of bond-proxy zombies which have been boosted by zero rates... our process is designed to avoid them.’
While stressing his conviction is not conditional on sovereign yield rises, the fund is also overweight some of the sectors that are best positioned to reap the rewards of higher credit costs, such as banks, whose margins increase during tightening periods, and insurers, which will be able to patch up pension fund liabilities.
The fund's largest holding is Aviva (AV +
) which makes up 5.5% of the portfolio, and is a heavy 'overweight' as the insurer only accounts for around 1% of its benchmark, the FTSE All-Share.
Insurers make up 26% of the fund's assets, with Phoenix (PHNX +
Click & Close Ads
Click & Close Ads
), Legal & General (LGEN +
) and Direct Line Insurance (DLGD +
) also among its top 10 holdings.
A total 3.3% of the fund is held in banks through Lloyds (LLOY +
), Royal Bank of Scotland (RBS +
) and US-based former RBS subsidiary Citizens (CIA.N), one of its few overseas holdings.
‘The insurance sector two to five years ago was being looked at as a bunch of businesses which didn’t really have a place in the modern world, and had been derated to yields of 6% or so.
‘They have since taken on new management and new systems. People have just been able to think a lot more cleverly about where they are at and where they are going.
‘We are a big conviction buyer. We are able to pick up Aviva – trading at 10 times current earnings and a forward yield of 4.5% – which has a genuine chance to be a major player globally within the next few years. We want these types of companies with big, long-term growth plans.
‘The banks are still paying for the mistakes of their past but have now got good management teams. Ross McEwan at RBS, for instance, is genuinely trying to do the right things.’
Over the last three years, the Majedie Income fund, which is co-managed by Yuri Khodjamirian, has returned 102.9% versus the peer group average of 54.9%. It currently yields 3.8%.While hostile to the dividend-dependent oil majors, the fund has 10.1% of its assets in the mining sector, which Reid described as having ‘gone 180 degrees from dreams of world domination to back to basics and operational improvement’.
Reid has 4.2% exposure to Rio Tinto (RIO +
) and began building a current 3.9% position in BHP Billiton (BLT +
) at the end of 2014.
‘[BHP Billiton’s] management had begun to realise that unbridled growth and development in an environment of moderate commodity demand growth was not sensible, and so reined in a lot of the capital expenditure spend,’ he said earlier this year.
‘There was a significant change in strategy towards simplifying and taking cost out of the business. They concluded, in summer 2014, that their best approach was to spin off a lot of the smaller, more complex mines, into a new listed vehicle. This would leave the rump business being 12 of the largest, lowest cost mines worldwide, which then could be aggressively simplified both operationally but also by taking out central cost complexity.
Reid added: ‘After the oil price collapse in late 2014, BHP finally indicated that it was going to cut capital expenditure in the less attractive areas (which were shale gas and longer-term projects, such as potash).Click & Close Ads
Click & Close Ads
‘In addition, and this was a critical part of our reasoning for the position, management also indicated that the spin-off (which was to be done as a distribution to shareholders) would not result in a subsequent cut in the dividend at the group company level.'
Click & Close Ads
Click & Close Ads
Thursday, June 25, 2015
