Martin Currie’s Ross Watson has realigned the firm’s European fund since it converted to an income mandate last week.
Now named Martin Currie European Income, the fund has adopted a new strategy, targeting a yield in excess of the MSCI Europe ex UK index alongside capital growth.
Watson has been increasing exposure to consumer discretionary stocks such as the automobile companies Daimler and Continental, and is now overweight in the sector.
“I like these stocks as they have good exposure to new car markets in the US and China, are well financed and managed and offer high, well-covered dividends as well as strong growth prospects,” he says.
The manager has also bought into Prosiebensat, a German television company, which he considers attractive because of its growing advertising revenues and an increasing dividend.
“I am happy to get exposure in the German economy,” he says.
Watson is also overweight in the energy sector and has increased positions in the oil services companies Seadrill and SubSea7.
“We are confident with the outlook for oil services globally,” he says.
“We see strong pricing power, particularly in offshore drilling, and Seadrill are the leaders in the market. And traditionally they pay out all of their free cashflow as dividends.
“SubSea7 has a lower yield but good growth,” he adds.
Watson is underweight in financials and has been selling out of European banks, such as BNP Paribas, on the grounds that the outlook for dividends is grim while the banks are under pressure to increase their capital reserves.
The manager is also slightly underweight in industrials and has sold out of Sika, a Swiss construction company.
“The yield was about 1%, so well below the requirement,” he says.
Telecoms is another sector Watson is underweight in.
“Yields may be high, but growth is challenged, as are future dividend levels,” he says.
“Telefónica has cut their dividend already and I expect France Telecom to do the same.”
Watson says he has “more or less” finished repositioning the fund and turnover will now fall to 30%-40% a year.
The fund has a yield forecast of 5.2%, with the index currently yielding just under 4%.