Williams, who runs the CF Miton UK Multi Cap Income fund, says that over the last 25 years the credit boom environment has allowed investors to make money from buying areas of the market that have had momentum. Because asset prices have tended to rise so quickly, Williams says the market has therefore favoured speculative investors over more cautious ones.
The manager says that these “momentum” strategies may favour the volatility of rising markets, but during more difficult times they lack robustness. Given that the consensus agrees that we are moving into a post credit boom environment where liquidity isn’t as readily available, he believes investors who don’t change their approach could well be caught out.
Williams says that the best – and historically the most rewarding – strategy is to focus on more resilient income growing stocks.
“The credit boom has changed the way people invest. It has become a case that investors have wanted to buy things that are going up fast such as higher beta stocks,” Williams said.
“Normally though, credit booms don’t last that long as extra inflationary pressures force up interest rates preventing over leverage. However, this credit boom has been global and has lasted for nearly 25 years.”
“As this environment has been with us for so long, most investors have come to treat credit boom trends as normal, which is dangerous” he added.
Williams says that one of the best examples to prove that the “buy low sell high” strategy has broken down is to look at the recent performance of emerging market equities.
He says that during the credit boom more and more investors turned their attention to emerging markets as they had performed strongly and offered fast growth. However, he says that mentality must change as “emerging markets are no longer emerging.”
Williams says that the end of QE will bring these economies’ "sizeable current account deficits" into the limelight.
Emerging markets have been something of a sweet spot for investors in the last decade.
According to FE Analytics, the MSCI Emerging Markets index has returned more than 250 per cent over 10 years while developed market indices such as the FTSE All Share have returned more than 100 percentage points less.
Performance of indices over 10yr
Source: FE Analytics
More recently that trend has shifted with emerging market equities returning a lot less than their developed market counterparts, and Williams says this is just the beginning of a longer term story where high beta names will continue to disappoint.
He says it isn’t just higher beta stocks which have benefitted from the credit boom; the dramatic rise – and now fall – of both fixed income and gold-related assets is also evidence that the period of momentum investing is over, Williams argues.
The manager says that this won’t be a short term theme as post credit boom trends can last for decades. For this reason, he says that even long-term investors must now turn their attention to income-paying stocks. This, he explains, is why he has turned his attention away from high-growth funds that he previously ran such as Henderson UK & Irish Smaller Companies, in favour of a yield-focused one like CF Miton UK Multi Cap Income.
Williams admits that many of the stocks he invests in are not the most exciting, but points out that prior to the credit boom these were the ones that were most popular with investors.
“Say there was a company which on average had been able to grow its dividend 11 per cent per year and its current dividend was 4.5 per cent,” he said.
“If it were to keep growing its dividend at that level from here you are getting 11 per cent capital growth plus the 4.5 per cent dividend, so all in all you are looking at a 15 per cent compound return.”
“It is a sensational way of making money, but over the past 10 years people haven't really cared about compound return; they've thought 'I can make 30 per cent in a year if I get into China at the right time.'”
“It has all been about the idea of buying low and selling high, and so investors haven’t been that interested in buying a yielding company and letting that income drag up. However, it has been the best way of making money over the long-run.”
“Beyond the credit boom there may be a renewed interest in compounding strategies. Good and growing income stocks could attract sustained investor attention,” he added.
Williams has been running funds and investment trusts since 1993, but he and Martin Turner only launched the £155.4m CF Miton UK Multi Cap Income fund in October 2011.
Performance of fund versus sector since October 2011
Source: FE Analytics
Over that time, the fund has been the fourth best performing portfolio in the IMA UK Equity Income sector with returns of 59.81 per cent, more than 20 percentage points more than the average fund in the sector.
The fund also sits in the top quartile over one year.
It has yield of 4.08 per cent with Williams and Turner holding companies across the FTSE All Share index. That said, stocks listed on the FTSE 250, Small Cap and AIM make up the majority of the portfolio as the managers feel they offer the best capital and dividend growth potential.
CF Miton UK Multi Cap Income has an ongoing charges figure (OCF) of 1.77 per cent and requires a minimum investment of £1,000.
