The strength of British equities has helped the performance of the AFIs, with Tony Nutt’s 3bn Jupiter Income trust, one of the most popular UK equity income funds, appearing in all three.
Investors in British equities have fared well so far this year as the domestic stockmarket has continued its strong upward trend. On a total return basis, the FTSE 100 index was up 8.6% and the FTSE All-Share returned 9.2% from January 1 to March 24, 2006.The three Investment Management Association UK equity sectors have also posted good performance. The average IMA UK All Companies fund is up 9.5% and sector average returns for UK Equity Income (up 9.2%) and UK Smaller Companies (11.2%) are all strong. All three Adviser Fund Indices have significant exposure to domestic equities, ranging from about 35% in the Cautious index up to 45% of the Aggressive AFI. Hence the healthy return achieved by the British stockmarket so far in 2006 has filtered through to drive the performance of the AFIs. Funds in the IMA UK Equity Income sector made up 58% of the British equity exposure of the Cautious AFI at the most recent rebalancing on November 1, 2005. This compares with just 21% of the domestic equity weighting of the Aggressive index being invested in equity income mandates. One of the most popular UK Equity Income funds among the AFI panellists is Tony Nutt’s 3bn Jupiter Income trust. The fund appears in all three AFIs but with more panellists favouring the trust for their cautious portfolio recommendations. Nutt says: “The market has been going up for some time and dividend growth has been strong. With businesses positioned well and having scope for more dividend increases, we are upbeat about the prospects for income growth. The emergence of financial buyers for businesses is also helping to support valuations.” Financials and resources stocks made up more than 50% of the portfolio at January 31, 2006. Nutt says: “We are comfortable with exposure to these sectors, with resources, financials and property stocks performing well in the portfolio.” Property company Persimmon has performed strongly and is still held in the fund, adds Nutt. “The banking sector has not been too exciting, with some disappointing returns, but these stocks are important for income,” he says. “Royal Bank of Scotland and HBoS provide a good yield but markets have not significantly re-rated them.” But Nutt says sectoral trends are less marked in the current corporate environment. He explains: “With companies generally having much stronger balance sheets and generating more cash, we have seen a rate compression in valuations. Sectors are not as homogeneous as they were five years ago and we have to be more and more stock-specific in our portfolio selections. We expect the current themes to continue, providing interest rates remain at similar levels.” Jupiter Income returned 35.2% in the year to March 24, 2006, according to Financial Express. Exposure to British small-caps varies markedly across the three AFIs. While the Cautious index includes just 1% of its UK equity exposure in funds in the IMA UK Smaller Companies sector, the corresponding proportion in the Aggressive AFI is about 15%. With a return of 41.1% over the 12 months to March 24, 2006, the Old Mutual UK Select Smaller Companies fund is one of the best-performing British equity mandates in the Aggressive AFI. The 340m portfolio is managed by Dan Nickols and had a 43% weighting in industrials at February 28, 2006. Nickols says: “We have been overweight industrials for more than a year. We are looking to the growth provided by international economies and a number of industrials have exposure to strong overseas earnings.” Laird Group and Spectris are two companies held in the fund that are exposed to strong earnings and growth overseas, says Nickols, and Charter, the portfolio’s top holding, continues to deliver a stream of upgrades. “We also hold an overweight position in the support services sector, where there is a whole diversity of opportunities,” he says. “Social housing is an area where we have seen a continued trend to outsource repair and maintenance work.” The fund holds property services provider Connaught to exploit this theme, Nickols explains. The increase in merger and acquisitions activity in Britain has contributed to strong growth in domestic equities, he adds. “The fact that there is a lot of corporate activity and rumoured takeovers is a feature that will continue to support markets generally,” Nickols says. “Corporate and financial companies are latching on to businesses’ strong cashflows. But we feel that the key area for future corporate activity will be in mid-sized companies rather than the small-caps.” However, Nickols adds a note of caution in relation to the prospects for smaller companies’ shares in Britain. “Small and mid-caps are trading at a significant premium to the main market and it is difficult to see further re-ratings in small-caps,” he says. Last year, the Aggressive AFI (up 27.6%) significantly outperformed both the FTSE 100 (up 20.8%) and FTSE All-Share (up 22%) indices. But the Aggressive index has lagged slightly behind the domestic market indices so far in 2006 (see graph). The Adviser Fund Index – A Summary
The Adviser Fund Index series comprises an Aggressive, Balanced and Cautious index each tracking the performance of portfolio recommendations from a panel of 18 investment advisers. For each risk profile, all panellists specify a weighted portfolio of up to 10 funds from the authorised UK unit trust and Oeic universe that, when aggregated, define the constituents and weightings of the three AFIs (see www.fundstrategy.co.uk/adviser_fund_index.html).