Bill Mott is continuing to lift the £383.2m PSigma Income fund’s exposure to pharmaceuticals after calling an inflection point in the market following fear over a slowing of quantitative easing.
Noting the sell-off after the Federal Reserve said it could taper QE later this year, Mott says he has been worried for some time about the market’s reaction “if the punchbowl were to be taken away”.
Sovereign debt yields have widened, stockmarkets saw their rally brought to a halt, the price of gold plummeted and the dollar strengthened after Fed chairman Ben Bernanke first raised the idea of tapering on 22 May.
Although the markets have been calmed by Fed officials stressing tapering would only occur if the US economy strengthens, Mott says “the cat is now out of the bag” when it comes to the eventual withdrawal of the central bank’s stimulus programme.
“We think that this is an inflection point for the whole market. The Big Ease is over. Markets have to start to grapple with life without massive stimulus. Even if stimulus is applied for a bit longer, we think markets will now be focusing on the exit,” the manager says.
“This inflection point may make it harder for ‘bond proxy’ equities, like some of the utilities, which have done very well in the recent [‘There Is No Alternative’]-fuelled hunt for yield. At the margin, we have been trimming in these areas and are investing even more heavily in our key overweight area of pharmaceuticals.”
The PSigma Income fund, which Mott runs with Neil Cumming and Eric Moore, now has 17.2 per cent in the pharmaceutical sector, with GlaxoSmithKline, AstraZeneca and Novartis. “We think the sector has defensive attractions in a low growth world and despite the recent strength in share prices, the stocks still offer a good yield,” Mott says.
A number of attractive features of pharmaceuticals are singled out by the manager. These include the West’s ageing population, emerging markets’ growing middle class, improving productivity and a coming wave of scientific breakthroughs.
Recently, the fund has initiated positions in Gilead and Celgene, two US-based biotechnology companies, and the manager anticipates adding more biotech names to the portfolio over the coming months.
“All in all, we think the re-rating of pharmaceutical stocks has only just begun. We think the PSigma Income fund is well-placed to benefit from what will be a multi-year phenomenon,” Mott says.