UK Equity Income managers are increasingly reliant on barbell-style investing as stocks fail to prov...
UK Equity Income managers are increasingly reliant on barbell-style investing as stocks fail to provide the necessary growth or yield.
The barbell approach, the practice of holding growth stocks to provide capital gains and high-yielding stocks to provide income, is intended to be flexible enough to be adapted to all market conditions, according to some fund managers.
The approach has been seen as introducing a new element of risk in the UK Income sector, with the appearance of high growth technology stocks in income portfolios.
Bambos Hambi, fund manager at Friends Ivory & Sime, said the clear rise in the style has been a logical reaction to markets in which growth has been the main driver and dividends are becoming less common as share buybacks are now more tax-efficient than paying dividends.
He said: "At the end of March the FTSE 350 High Yield Index was down 16% over six months. The low yield equivalent was up 14%. It made 1999 an abysmal year for income funds."
He said the risk was that the style would not work equally well in all market conditions, a point that fund manager George Luckraft, who runs the ABN Amro Equity Income Fund, disputes.
Luckraft, who adopted the barbell approach last year, said growth and income weightings in a portfolio can be tilted to suit the market conditions to be heavy on growth stocks when the market favours them and back into value if they become oversold.
Its most important characteristic, he said, is to allow fund managers the flexibility to alter their stance as market conditions change. Luckraft said that was reflected in the performance of his fund which benefited from the rise in technology, but did not suffer all of the downside by reducing positions in February and March. The fund achieved returns of 42.7% for the 12 months up to 19 July, compared to a sector average fall of 5.2%.
Luckraft said: "About a year ago I could see a lot of technology floats coming to the market that were threatening the business models of a lot of the stocks that I was holding. It is a theme which continues to be relevant. Because of technology there continues to be a real deflationary environment in which a lot of traditional income stocks will continue to struggle."
The barbell approach is also favoured by Fleming Asset Management in its S&P Extra Income and Premier Equity Income funds, but fund manager James Inglis-Jones, who co-manages the funds with Gary West, said it is important to reduce the risk of running a barbell style in an income fund by operating a wide portfolio.
Inglis-Jones said that the two funds typically run around 200 positions, compared to a much narrower sector average of around 40 to 50, significantly reducing stock specific risk to produce an attractive risk/ reward profile.
Nick Hollings, managing director of Principal Premier, agreed that the barbell style has become a strong feature of the sector.
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