ABN Amro's george luckraft believes 6% will be a good yield in 2002 and favours convertibles
Low deflation means that achieving decent returns in future years will be a struggle, but not impossible, says George Luckraft, manager of the ABN Amro UK Income fund.
Speaking at Investment Week's Market Forum earlier this month, Luckraft said the main thing is not to get greedy. Although it is possible to get lucky and make a lot of money, being greedy is more likely to result in big losses rather than big gains, Luckraft added.
That is because excess returns means excess risk, and this is obvious given some of the accountancy trickery that has been revealed in recent times, not least in the spectacular fall from grace of Enron.
He said going ahead, 6%will be considered a good yield. Although boring, yields of these levels might make sense and there are some opportunities in certain areas.
'The first that I particularly like is the convertibles area, because it combines the potential of an income with some potential capital rewards,' he says.
'Also, as the cycle turns, there will be some opportunity in distressed debts. Many of the institutional mandates in the fixed income markets are driven by the bond agencies. If a bond gets downgraded below investment grade, institutions become forced sellers and there are no natural buyers until they get down to ridiculous levels.
'But as the cycle turns, that should start to reverse and we should see a period of upgrades. This will have the opposite effect in that many bonds will then meet other investors' criteria so there will be the opportunity to make substantial capital gains as demand increases. However it will be an area fraught with risk and there will be those that get it very right and those that get it very wrong.'
Luckraft said there are also good opportunities for stockpickers in the UK equity income sector. This is because companies with strong pricing power and cashflows will be in a position to take market shares from competitors who have been struggling.
'It won't be particularly exciting, maybe 4%-5% income return plus 10% capital return, but if you manage to find that on an overall basis you will do very nicely,' he said.
One of the best ways to make good returns is to go against trend, Luckraft says. He cites the actions of competitors Neil Woodford of Invesco Perpetual and Bill Mott of Credit Suisse.
'Neil Woodford did not chase technology stocks during the bubble of early 2000 and was criticised in the press for being a dinosaur and not going with the trend. Certainly, his strong performance now shows that he was not a dinosaur,' Luckraft says. 'Another who goes against trend and delivered good returns is Bill Mott of Credit Suisse, who didn't return to the income sector to run money until 20 March 2000. He returned at a time when he could see good opportunities and has also achieved good returns.'
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