Manager focus: Katharina Hoyland

Invesco Perpetual’s Katharina Hoyland says the rebound in equity markets has boosted the prospects of European equity income stocks, although she is still wary of the region’s banking sector.

“It is no secret that economic activity has made a rebound from its extreme lows, fuelling a strong recovery in equity markets over the last few months,” she says, adding that this bounce back has left behind quality income stocks that were less affected by the financial crisis.

Some European banking stocks have returned to their former highs, including BNP Paribas, Credit Suisse, and Deutsche Bank. “But the banking sector is short of capital so we remain cautious,” she says. “Balance sheet recessions take longer than ordinary recessions.”

Meanwhile, banks have slashed their dividends by more than any other sector of the market, making them even less attractive to income seekers. European financials have cut their dividends by 58% since earnings peaked in January 2008. The information technology has cut its dividends by 26% and the consumer discretionary sector by 14%. However, healthcare has seen its dividend increase by 25% over the same period, utilities by 24% and consumer staples by 18%.

Healthcare in particular has worked well for the fund as a defensive play, and it is cheap, reflecting the market’s low expectations of the sector. “Healthcare has been derated in recent years to levels which discount no value at all in pipelines,” Hoyland says.

Hoyland has been avoiding cyclical areas of the market, which she says had become too expensive. “The market had discounted a robust bounce back in cyclically-sensitive earnings,” she says.

Instead she has been trying to find companies with high visibility and steady earnings, with holdings in sectors such as industrials, pharmaceuticals, telecoms, utilities, and certain media stocks. “Having been ignored in the rally, these stocks are particularly cheap in both absolute and relative terms, and have good yields,” Hoyland says.

Among the top 10 stocks in the £37m fund are Novartis and Roche in the healthcare sector, KPN in telecoms, Vivendi in the media sector and Zurich Financial Services in non-bank financials. The average dividend yield among the top 10 is 5%.

Hoyland says there has been a rise in dividend culture in the European market which will continue to benefit income investors. “European companies are paying more attention now to paying out a reliable chunk of their earnings each year, and of the importance of this to shareholders.”

Hoyland is taking maternity leave in October. Stephanie Butcher, her co-manager, will take over the management of the European Equity Income fund while she is away.

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