The manager of Axa Framlington Equity Income says his fund is fully invested, and he plans to keep it that way. “We think the equity markets are well supported. There will always be volatility, but my gut feeling is equity markets want to go higher,” Luckraft says.
“Equity valuations are attractive and 10% of the market cap is in cash. Previously, the market had to absorb selling from pension funds going global or moving into bonds, but now we are at the stage where there is not much more in the way of equities to sell.
“There has also been a pick-up in corporate activity and the markets are not reacting too badly to the state of the eurozone.”
The performance of the £157m fund has suffered over the past year owing to poor returns from small caps, which represent 45% of the portfolio. The FTSE Small Cap index underperformed the FTSE 100 by over 13.5% in the second half of 2011.
However, year-to-date performance has picked up following the small-cap rally at the start of the year. (article continues below)
“It was a tough end to last year,” Luckraft (pictured) says. “Small caps underperformed quite significantly in the market rally from August to the end of the year, although large-cap income stocks did well. At the beginning of this year, the broader market outperformance helped the small caps and the big stocks underperformed, so there was a total reversal.”
At a stock-specific level, Luckraft saw poor returns from Alumasc, a building and engineering firm (a 1.8% weighting), which issued a profit warning on the back of cost over-runs caused by an unprecedented surge in demand; and Morson, a technical recruitment group (a 1% position), changed its dividend policy.
“That was not helpful,” says Luckraft, “but we have maintained our positions in both [companies].”
Despite the disappointments from Alumasc and Morson, Luckraft says, the dividend season was “fairly attractive”, with the fund currently yielding 4%. However, sterling’s short-term highs have taken the edge of results, he says, with many global companies declaring in dollar or euro terms.