Jupiter income fund manager Tony Nutt believes any bull market in equities will have to be led by company dividend growth rather than valuations.
Nutt says company valuations are very unreliable at present and a sustained rally is only possible if investors see a reliable source of dividend growth from companies.
He says: “The pendulum is swinging at a rapid pace. One moment markets are bearish, so valuations are low, the next they are bullish and valuations are high. That is a pretty unreliable way of getting returns from an investment portfolio. It has been frenetic gambling rather than investing since 2007.”
Nutt says companies are now recognising they must send the message of sustainable income growth.
He says: “The big stocks are starting to do this and the smaller stocks will follow and I am starting to see the benefits in my portfolio.”
Nutt has endured a difficult time in the past few years, with his £2.1 billion fund underperforming its peers. Over three years, it is fourth quartile in the IMA UK equity sector, returning 25.7% compared with a sector average of 38.7%. (article continues below)
Over one year, the figures have been stronger, with the fund second quartile, having lost 0.2%, compared with an average fall of 0.9%, according to figures from Morningstar.
Nutt says there a number of factors that have led to an upturn in performance.
“It has been frenetic gambling rather than investing since 2007”
He says: “Of course, there have been no mining companies and lots of pharmaceuticals. I have also been holding an aggressive overweight in the largest companies as the smaller ones have been diabolical.
“My top five stocks – GlaxoSmithKline, Royal Dutch Shell, Vodafone Group, AstraZeneca and BP – have all been around the 8% mark and together they have been near the unit trust limit, where the top five stocks must account for no more than 40 per cent of the fund.”
Nutt says he still sticks to his decision to take all the mining stocks out of his fund in 2007 and then missing the bounceback.
He says: “I can defend the long-term view. There were big rises but I am happy with the call. Looking forward, do we go back into the sector? The problem is that I see capital expenditure escalating beyond reality. China is slowing down and costs are still rising sharply while metal prices have had much of the speculation taken out of them.”
Nutt says the outlook for the retail sector is still grim but that he is far more bullish on pharmaceuticals.
He says: “They have done much better. Glaxo and Astra have done well and we have also put Shire in the portfolio. Much of the upside in that sector is still to come. This is not a short-term argument, there are healthcare concerns and pressures over the longer stretch.”
Nutt says dividend growth will be tougher in 2012 after a strong bounce this year but it will not decline. He also expects equity income to make a strong bounceback in 2012.
He says: “Given my views on income growth, I expect UK equity income to be the dominant sector next year. It will be interesting to see who leads the pack in terms of performers in the sector.”