Tony Nutt, manager of Jupiter Income, boosted the fund when he bought Alliance & Leicester shares after they plunged – and he maintains an upbeat stance on housebuilders, despite a dip.
Tony Nutt of Jupiter is a measured sort of fellow. One rule he follows is not to buy at auction after the official market close at 4.30pm. But these are extraordinary times.
Last week as Alliance & Leicester (A&L) plummeted through the floor in after-hours trading Nutt acted decisively. He went into the auction and said he would buy as much A&L as anybody would sell him. Given the fact that A&L shares were at one time 47% down on the day before – and bounced back nearly as much the following day – it was a great call.
Nutt hasn’t held Northern Rock for years. He never bought the idea that the bank could continue to knock out 15-20% earnings growth every year, come what may. But he did know that there was no way that A&L was heading down the same path. Hopefully, for the hundreds of thousands of investors who hold Jupiter Income, Nutt’s purchases will boost performance at the fund, which is going through a slightly uncomfortable phase.
The 4.2 billion fund, one of Britain’s largest retail funds, is up just 5.7% over the past year, below the sector average of 6.4% and quite a way behind the 10.7% rise in the FTSE All-Share over the same period.
Nutt is upfront about the causes. “It was about leaving mining early and retaining a position in housebuilders and property,” he says. He can be forgiven the mistake on miners; after all, his analysis was correct, it was just a bit too soon. But his continuing position in the housebuilding sector is perplexing.
One fallout from the Northern Rock crisis is likely to be the housing market overall. The biggest player in the market for the first six months of this year is out of the picture. Lending rates were on the march upwards anyway, and the temptation among the likes of Halifax must be to fatten their margins, raising costs to borrowers. The days of 100%-plus loans are also numbered. So why would you want to be in the housebuilders, such as Persimmon, one of Nutt’s biggest active bets.
“I get asked about this more than anything else,” says Nutt. “Housebuilders have outperformed for six years and this year they have underperformed. But the margins at Persimmon are still over 20% and the return on capital employed is more than 20%.
“Planning laws, the requirements for new homes, the fact that we need to build new estates to replace the [council] estates of the past are all in favour of the builders.
“I have argued for some time that we have probably hit the ceiling on house prices, but I can’t see why there should be a collapse. I think the builders will give a good return – and their dividend cover is better than every other sector of the market.”
He likes oils, telcos and engineers, but says banks, pharmaceuticals and utilities are overrated. He holds Vodafone, BT and Telefonica, as much for its O2 operations in Britain as for its Spanish landline network. “The telcos are producing high levels of free cashflow, with a good yield and dividend growth.”
But he’s not tempted by the yields on banks. “In my experience, banks outperform for long periods of time, then underperform for long periods of time,” he warns.
As one of Britain’s most renowned equity income investors, it’s interesting that he blames “the pursuit of income” as the reason for the credit crunch.
“There has been such a following for higher yielding returns at a time of low interest rates that people have been irresponsible and reckless in what they have done. The unwinding of this will take at least 18 months. The credit bear market has really only just started.”
Nutt has seen it all before. He points to Drexel Burnham Lambert’s bankruptcy in the 1980s, and KKR’s bid for RJR Nabisco as the precursors for a sharp widening in American high yield spreads and rising default rates, although the trigger was the less well known leveraged buyout of Ohio Mattress.
“The margins over gilts has been at a level that I can only describe as reckless,” he says. “Like others, I have argued that risk is mispriced.”
There is a detectable difference between what Nutt sees happening to interest rates and where the boss, Edward Bonham Carter, stands. Bonham Carter reckons that by the end of this year, interest rates will be lower. Nutt’s not so sure. “The Fed has cut, but they will be raising rates again in the next six months.”
His concern is that the easy credit conditions for most of this decade has stoked up inflationary pressures, even if the headline British inflation rate appears to be falling.
But don’t worry, the prospects for income investing are far from dim. What comforts Nutt is demographics. “This will be the most important trend in markets over the next few decades,” he forecasts. He then points to a graph revealing how by 2050 we are going to be swamped by old women. The 80-plus group will be the most numerous in society, in an inversion of the traditional demographic pyramid. They will have a voracious demand for income, and will push corporates to improve payouts.
And it is payouts that should be at the heart of any investor’s strategy, says Nutt, and that’s a view shared fully by Bonham Carter. “Dividend cover is high across the corporate sector and debts are low. It suggests that the corporate sector has taken on board what it is that investors want in the form of dividends and dividend growth. Multiples can expand and contract, but that is only about sentiment. It is dividends that matter,” says Nutt.
It is funny how one scribbles down what are a lot of fairly gloomy statements about the market from Nutt. But although he talks bearish, he is not that bearish at all. What the credit crisis shows is it’s old-fashioned equities that are surviving the crunch, and Nutt expects a rally in a few months’ time.