yields at their most attractive level for 20 years, says manager of schroder uk income fund
Schroders UK Income manager Humphrey van der Klugt sees equity yields at their most attractive level for 20 years against gilts.
The manager of the Schroder Income fund said the gap between equity and gilt yields has narrowed to its closest point for a generation. The average dividend yield on the FTSE All-Share is at 3.53% compared to a 4.36% redemption yield on 10-year gilts. This, he said, represents a huge opportunity for equity investors willing to buy.
Since taking over the fund from Ian McVeigh in February 2002, Van der Klugt has cut back the number of holdings in the portfolio by some 30%, from 120 to 84, mainly by selling small caps.
While this reduction has taken place throughout the year, the majority of this selling took place in August, which Van der Klugt said served him well as he sold into a rally, producing higher levels of cash to reinvest elsewhere.
The changes Van der Klugt has made to the fund are not radical, he claimed. He said he has not altered its objective, rather he has just spelled out to investors what the fund actually does and what it invests in.
Van der Klugt said since he took over he has introduced more of a framework to the fund. As a guide, when he invests in large companies he will typically invest 2.5% in a company and will start taking profits when it grows to 5% of the portfolio.
When investing in the FTSE 250 and smaller companies, the guide is 1.5% portfolio exposure to a stock with profits taken at 3%.
He said: 'We do not benchmark ourselves against the FTSE All-Share index, I feel the equity income peer group is more relevant. As such the emphasis of the portfolio is on active stockpicking. Secondly, an income growth bias is key to investing, while I want the fund positioned with a good yield I also want there to be income growth possibilities.'
Companies which can not only provide decent yields but also have the potential to grow their dividends are of more interest to Van der Klugt than companies which have high yields but no growth potential.
For example, he sold a large holding in the steel company Corus at 80p as he said it was operating in a deeply cyclical industry and was a stock without any intrinsic growth. In its place he bought the gas company BOC.
He said BOC has a good yield of 4.7% and is in an industry with an intrinsically better growth profile than steel, it is reasonably stable. Since selling Corus it has fallen to 28p, as at 23 January.
Schroder Income has returned -18.3% over the 12 months to 13 January, offer to bid, compared to a UK Equity Income sector average of -22.8%, to rank 9 in a field of 78.
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