Performance of Charles Stanley Regular High Income fund vs sector over 1-yr
Source: Financial Express Analytics
Harris says that 2008 saw the fund sell off the majority of its equities but now he says that he is looking again at quality companies above bonds.
According to Financial Express data the Treasury 8% STK 2021 is the fund’s largest holding. It is also the largest holding of 22 other fund’s available to UK investors and is in the top-10 holdings of 93 funds. The IMA Equity and Bond Sector currently includes 23 funds.
Trustnet asked Harris how he had seen off peers to become the best performer in the sector.
Q: What is your asset allocation approach?
A: Asset allocation driven by two main factors: a) to attain high income without undue risk and b) to maintain, as long as possible, the 'distribution status' of the fund, which dictates that at least 60 per cent of assets must be invested in fixed interest securities that pay "interest" rather than "dividends".
The fund is widely held in ISAs and SIPPs where income tax deducted at source can be reclaimed. We are also aware that many of our holders are pensioners and a tax reclaim is essential for them to help maximise their net return.
Q: Have there been/will there be any significant changes in your asset allocation? What are you looking for before this happens?
A: Having sold many equity holdings in 2008, we have just begun to re-enter this particular sector of the market in a modest way through purchases of well-financed, good quality companies. Equity positions, either through direct equities or collectives, account for approximately 15 per cent of the fund at present. It is still too early to talk about the "green shoots of recovery", or whether quantitative easing (QE) will succeed, but we do feel that investment in good quality equities now carries less of a risk than it did six months ago and are therefore giving them the opportunity to compete with corporate bonds and gilts in the selection process.
Q: How do you approach risk management?
A: The short answer is flexibility. We always bear in mind that "risk" is a moving target and in fact over the last year one could say that not only is the target moving but the weapons to nail it down must be inspected after every outing.
A number of factors are taken into consideration, but we look to diversify as much risk as possible through the depth of the fund’s investments as well as the quality of each individual company. Here we look overwhelmingly for well-established, mature businesses which, in the case of company debt, have the ability to comfortably meet their interest obligations. We additionally try to avoid building up too much exposure to any one sector or company (of the 105 holdings in the portfolio at the moment 78 represent individual companies and issuers) while at the same time maintain a focus on the UK. We try to avoid overseas currency plays, because sooner or later you will have to hedge that risk and in our opinion "hedge" equals speculation.
Q: What are the basics of your stock selection technique?
A: We do not have a distinct investment 'style' other than innate caution. We are aware that most of the holders of our fund are elderly folk looking for a relatively safe source of income which is an improvement on anything they may find from a deposit account. Also much depends on the state of the market. At the moment this means we are solidly defensive with a heavier than usual weighting towards bonds.
Q: What factors/actions enabled you to outperform the other retail funds in your sector over the last year?
A: Our sector is Equity and Bond Income and I think our competitors have kept faith with the bulk of their funds in equities. We know from reading our competitors' fact sheets that to help income they probably had substantial investments in the banking sector. We are the first to admit that we held Barclays and Lloyds ordinary shares but sold last year when the market sniffed problems with RBS and HBOS. The shift from being record payers of dividends to record fund raisers via rights issues was indecently hasty and prompted us to exit the sector. The fund is relatively small in comparison to some competitors allowing us to adopt a flexible approach and ensure we can either enter or depart from a holding with relative ease. The fact it also has a well-diversified, multi-asset portfolio has been a significant benefit in these volatile times.
Q: What do you see as the biggest macro factors affecting the fund over the coming year. How do you account for these as a fund manager?
A: Macro factors over the coming year:
a) The rudderless ship that is HM Government could easily take a wrong turn with some silly form of taxation and/or legislation which could alienate or indeed severely impair our leading companies.
b) We still consider "currencies" as a leading risk. The problems in Pakistan are uncomfortably close to the engines of world economic growth in India and China. We would feel uneasy with any exposure to emerging market debt.
Q: What effect do you think quantitative easing will have on your bond portfolio?
A: The immediate reaction in the gilt-edged bond market to the start of the Quantitative Easing (QE) programme was to drive medium and longer-dated holdings higher in price. This presented some opportunities to take selective profits and in turn has helped underpin prices. However, since then, we have actually seen a steepening of the yield curve with the 10-year benchmark yield now above the level where it stood when QE was announced. The problem with any plan that has been created comparatively quickly is that "laws of unintended consequence" will flourish in due course. Our task is to ensure we spot the favourable avenues that may be opened up.
The scheme was expanded by a further £50bn last week with scope for purchases in the corporate bond sector as well. However, we may possibly see more of an impact in the equity market as the recipients of the monies have tended to be 'other financial institutions' (rather than the intended targets such as pension funds or mainstream UK banking institutions) may in turn commit more funds to equity investment (probably the first of the unintended consequences?).
Q: What is your assessment of what assets will perform best over the next year
A: We do not see the current rally in equities turning into a new and wonderful sustained bull run but it will encourage investors to look at the sector carefully. As a result we are sure that the big companies with solid earnings, which throw off cash and have an excellent dividend payment record will attract money away from bonds especially if interest rates remain in their current lowly state. Money on deposit is a lost cause, so again an asset with potential (an equity with income) should be the winner.