Investment Trust profile: F&C manager backs UK mid caps

The Brexit vote has left many mid-cap stocks underperforming the blue-chip overseas earners but F&C’s Rodger McNair is a firm believer in their potential, despite Brexit.

The manager of the F&C UK High Income trust is happy to increase exposure to some “out of favour” holdings in the portfolio and he is looking at higher yielding names.

McNair says: “Around 60 per cent of the FTSE 250 firms’ revenues are much more domestic than the FTSE 100. We’ve seen some of these mid-cap names underperforming but we’ll increase some of these positions as we still think there is potential.”

The manager mentions utilities stocks such as Pennon, a provider of water and waste services, currently yielding 4.5 per cent.

McNair also includes UK retailer of car maintenance Halfords within the list as a “very strong” business in the market, which has recently announced a special dividend after better than expected sales.

In January, the £146m trust changed its name from Investors Capital Trust to F&C UK High Income trust, but the move will not bring any changes to the investment objectives of the fund.

McNair says: “We simply felt the new name reflected more what the company’s objectives are. Also, the F&C prefix better aligns the firm with the other funds. It will help investors to get to know the trust.”

McNair joined F&C in 1990 as an investment manager in the North American team. In 1994 he moved to the UK as senior investment manager for the UK equity team managing different investment trust and pension fund clients. He says the fund had a big switch in the past six months. At launch in 2007 it was more evenly exposed to UK equities and corporate bonds, as at the time bond yields were more attractive.

The portfolio has been split into an equities portfolio and a higher yield portfolio, where equities make up the majority of the trust’s assets, mainly UK large and mid-sized companies. The higher yield portfolio is currently invested in predominantly investment grade corporate bonds. However this now only makes up 2.5 per cent of the fund.

McNair says: “We are still flexible on bonds but have a strong preference for equities as you have no income penalty. We also have the flexibility to move down the market spectrum. The fund now has 75 per cent in the FTSE 100 but there’s flexibility. We have to achieve a level of income to cover the dividend.”

The trust has 50 holdings and a “modest turnover”. It is quality-biased on the names it picks, says McNair, meaning companies that have strong balance sheets and can generate cash.

Among these is BBA Aviation, which operates in regional airports in North America and Europe.

McNair says: “BBA Aviation mainly serves private and commercial businesses. It has acquired a rival, Landmark Aviation, and that deal will bring a lot of synergies and tax benefits. It is a good exposure to any economic improvements especially in the States and it’s a strong dollar earner.”

An “historical” holding in the trust is Melrose, an industrial turnaround specialist with “a very good track record” which has recently closed a deal with US manufacturing group Nortek for £1.6bn.

Looking ahead, McNair is positive on both the UK and the US in terms of economic outlook saying in the second half of 2016 fundamentals improved for both countries.

The firm’s net asset value total return per share was 84.6 per cent since its launch to the end of January and outperformed returns from the FTSE All-Share Capped 5% index of 77.8 per cent over the same period, according to Lipper.

However, the trust lagged its sector, the UK Equity & Bond Income, over the last five years returning 62.4 per cent versus the sector’s 99.1 per cent, according to FE.

Rodger McNair is manager of the F&C UK High Income trust