The Aegon UK Equity Income fund will adopt a defensive stance at launch as the managers are not convinced markets are on the path to full-blown recovery.
Iain Wells says the nature of the fund, to invest in high yield stocks with the potential for capital growth, will also skew the portfolio towards defensive holdings.
“We think UK equities have a challenging outlook. We have obviously seen some signs of recovery but we are not convinced it is a full blown recovery and it could be more muted.
It will be a difficult year or so and I think it will remain that way in terms of themes.”
He explains that it will be a time of rotating in and out of sectors, rather than trying to stick with themes for a long period of time, as not all of the pessimism is out of the market.
The fund, which will be launch on June 30, will sit in the IMA UK Equity Income sector.
Wells will co-manage the fund alongside Douglas Scott in a similar way to the Aegon Scottish Equitable Distribution Life fund they have managed since 2003.
The income vehicle will not be a mirror of this fund as the Distribution mandate has a higher income target of 125% of the FTSE All Share, compared to the UK Equity Income target of 110% of the index.
The fund will invest at least 80% in British equities and the remainder can be invested in corporate bonds or overseas equities.
The pair has been running a model portfolio that had a higher exposure to corporate bonds than they anticipate will feature in the live fund as the “opportunities are not as good as they have been”, says Wells.
It is likely to hold 60-65 stocks and Wells says stock selection will not be completely driven by yield.
“We will be looking at our UK equity funds [that Aegon currently runs] and try to own all of its high yielders. We will then look at stocks that are yielding 110% of the market and then those that do not yield as much but are core growth stocks.”
Positions in pharmaceuticals and consumer stocks such as Unilever and British American Tobacco are likely stock picks, while Well says the fund may also be underweight financials and commodities.