PSigma’s Bill Mott has rejected suggestions that the British economy is going to experience a V-shaped recovery, although he says action by central banks has prevented “financial Armageddon”.
The manager of the PSigma Income fund expects there will be some setbacks along the road to economic recovery, but says: “We are seeing month-on-month anecdotal evidence that the economy is stabilising.”
Mott says Britain is entering a period of anaemic growth, which should be good for markets as investors focus on the earnings delivery of companies rather than trying to play valuation inconsistencies.
He predicts the market will be able to deliver returns of 10% a year for the next five years, of which half will be in dividend payments. Consequently, the manager says equity income funds are well placed to benefit from the next stage of the market cycle.
Major themes in the Income fund at present are in companies where Mott perceives there is a valuation anomaly, including the Daily Mail, Greene King, Marston’s and Tate & Lyle. He is playing overseas earnings and through stocks such as British American Tobacco, and the oil and telecoms sectors, many of which also have a high proportion of repeat revenues.
The two largest underweights in the fund are 3% in banks against the sector’s 13%, and 1% in mining against the sector’s 10%. Mott says these two sectors will be most vulnerable to extreme economic outcomes such as inflation or ongoing recession.
Meanwhile, Mott is trimming down his stock list to make the Income fund a more focused portfolio. He says during his time working for Credit Suisse, his funds typically contained 45-70 stocks, while the Income fund had 125 stocks at its peak last year.
Mott says he wanted to reduce the stock specific risk because stock opportunities were so abundant. At present, the Income fund has 84 stocks, but the manager is looking to reduce this further.