Yield hungry equity fund managers are finding more to go for among stocks than corporate bonds. Brit...
Yield hungry equity fund managers are finding more to go for among stocks than corporate bonds. British American Tobacco (BAT) paper yields 8.6% while Orange and Atlantic Telecom bonds offer 8%, an attractive proposition compared with the 2.3% yield on the All Share.
By contrast Scottish Power and the Halifax paper yield 7.4% and 13% respectively and presumably have better prospects for capital appreciation if and when the enthusiasm for new economy stocks dies down.
Carl Stick, manager of Rathbone Income unit trust, holds no corporate bonds and has only one preference share preferring to obtain yield from equities. He says: "I regard a UK income fund as being a relatively safe vehicle so it should not exposure investors to unknown risk through investing in technology stocks. If people want expose to technology they should invest in a technology fund."
The fund already achieves a yield above the sector average so does not need to invest in high yielding debt, according to Stick.
What he is looking to do is to invest in equities which offer the necessary yield but also provide capital growth which at the moment is coming from the technology sector. Stick favours traditional high yielding stocks which have exposure to technology. One of his holdings is FKI an engineering company, yielding 3.56% on a P/E of 11.6 times, some 75% of its business involves producing gas turbines and wheels for shopping trollies.
The remaining part of the business is invested in Logistex, a logistics company. Stick says: "The company produces conveyer belts which a play on the internet with companies owning huge warehouses as distribution centres."
Norwich Union also does not hold any corporate bonds believing there is better value in high yielding equities. Scott McKenzie, manager of Norwich Union UK Equity Income, says: "It is not the right environment to be investing in corporate bonds.
"There is no expectation of bond yields falling because interest rates have not peaked and the bond market is expecting inflation to rise."
McKenzie takes a barbell approach to running his income fund investing around 45% of the portfolio in technology stocks, with 20% in high yielding equities and 35% in mainstream equities. Two high yielding equity stocks he is favouring currently are Scottish Power and the Halifax.
By contrast the Britannic High Yield unit trust does have corporate bond exposure and has increased it from 8% to 13% in the past six months. It is also overweight software, media and telecom stocks. Recently it bought into Orange and Atlantic Telecom bonds.
Margaret McLaren, investment director pan-European equities at Britannic Asset Management, prefers to hold corporate debt instead of high yielding paper, such as BAT. She says: "I believe I am more likely to get capital growth from my fixed interest holdings in Orange and Atlantic Telecom than I am from BAT."
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