Tim Cockerill is head of research at Rowan & Co.
Q: Are you surprised that UK Equity Income funds were the worst sellers in August, according to the IMA?
A: I hadn’t seen that but it is not that much of a surprise. Investors are seeing dividends be cut, with Liontrust and Rathbones recently making cuts on their funds (the first cut in 19 years on Liontrust First Income) which has cast a shadow over the sector. However, the fact is equity income funds just aren’t seen to be very exciting right now compared with the cyclicals such as mining, resources and emerging markets. The silly thing is that income is one of the best sectors for most investors to put some money in. However, I wouldn’t be surprised if this isn’t the start of a long-term trend. Investors are looking to where the growth will be in the next 10-20 years, like emerging markets, and that is what will pull in the capital. Yet when you look at history, the majority of returns from equities has come from dividends. Maybe the world is changing.
Q: Property funds are once again seeing sustained inflows, what is your stance on the asset class?
A: For me, commercial property must now have hit the bottom. There can’t be much downside left, with the sector already down 40%-plus from its peak. All the excess is gone and so are the investors who don’t want to be invested. For example, the Aviva Property Trust has fallen from its peak of £4.5 billion in assets to £1.2 billion now. Meanwhile, in the closed-ended universe, many funds are now trading at premiums, which tells you that a lot of investors think there is great value in the property market.
Q: Corporate bonds continue to dominate sales, are you a fan of the sector?
A: In the scheme of things the key is that spreads have contracted sharply. Our concern is that the gilt market has been supported by the Bank of England, who have been the major buyers, creating demand which ordinarily would not have been there. At some point the Bank of England will stop buying and the question is what will happen then? Gilt prices will fall and yields will rise which could lead to a sell off in corporate bonds. In the meantime, spreads can tighten but there is no way investors will get the same level of return out of corporate bonds over the next six-nine months compared with the previous nine months. That unique period of exceptional values has now been closed.
Q: What new funds this year have caught your imagination?
A: The ones we have paid attention to are the Ucits III equity long/short funds. Examples include the Gartmore UK Absolute and European Absolute funds, SVM [UK Absolute Alpha], Cazenove [Absolute UK Dynamic] and Ignis [Argonaut European Absolute Return]. We are interested in these funds because they provide a new type of investment and the ability to short.
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