The mid cap index in particular has done extremely well in recent years and both large and small cap managers have bumped up their exposure to it.
FE Trustnet research recently showed that many of the best-selling funds in recent months have a mid or multi cap bias, implying that a large chunk of the £1bn withdrawn from Neil Woodford’s income funds is finding its way into that part of the market.
However, Whitley (pictured) has sold down most of his stocks in that part of the market as there are few opportunities there.
He says mid caps are too expensive and investors are too optimistic about the earnings growth that would have to support a growing dividend."The mid caps look less interesting now," he said. "We used to own quite a few when they yielded 7 per cent, but they are down to a 4 per cent yield."
"If there’s any value to be had, it’s in the large cap stocks – some of those energy companies which are cheap but have a lot of long-term potential."
"There isn’t as much yield on the small cap indices on companies we would feel comfortable owning, in the mid caps too," he added.
A number of high-profile managers have made a similar point in recent weeks. Mark Costar of the JOHCM UK Growth fund said he had almost completely sold out of mid caps in favour of large caps.
Whitley extends the argument to dividend-paying stocks, which have garnered attention in recent months on the back of a period of strong performance.
Source: FE Analytics
Funds such as Unicorn Income and Chelverton UK Income are sitting at the top of the performance charts and investors are starting to take notice.
Unicorn Income has taken inflows of roughly £275m over the past 12 months while Marlborough Multi Cap Income has seen inflows of £207m. Chelverton has seen £114m of new money come in.
Whitley, along with the other managers at Aberdeen, takes a valuation-driven stock-specific approach, buying things that are already cheap and thereby limiting the downside and maximising the upside.
Very few stocks currently pass this sort of screen, he explains.
"Opportunities in the market are few and far between," he said. "We see no point in selling stocks that are fairly valued to buy others that are also fairly valued."
Such scepticism could worry those investors who have been increasing their weighting to higher risk assets and buying more equities after a period of outperformance.
Whitley says that the market has got ahead of itself and that earnings forecasts for UK companies are too high.
"Analysts tend to start the year with great expectations and then lower them as the year goes on," he said.
According to data compiled by Citi, estimates of both earnings growth and dividend growth have been radically cut back from their early-year highs in the past three years and the manager expects the same to be true of 2014.
The consensus forecast for dividend growth on the UK market was around 12 per cent at the start of the year but sunk to below 6 per cent.
The consensus forecast for 2014 is just under 8, but Whitley says that 6 per cent is more realistic.
Earnings growth forecasts were around 10 per cent at the start of the year and are likely to come in negative overall.
At the moment, predictions for 2014 are of 10 per cent growth, but Whitley says around half that figure is more likely.
"Long-term, we tend to be conservative, long-term [we would say] maybe 5 per cent," he said.
"Forecasts are pretty high," he added. "Analysts don’t want to see this because they aren’t allowed to. The money [from QE] is finding its way into things like art and other non-financial assets, but not into the economy."
"A number of our companies are very global in nature and are in industries with structural tailwinds behind them, such as demographics. And they are pretty well managed."
"Put that together and you might get 7, 8 or 9 per cent earnings growth every year for the next few years or so."
Whitley took over Dunedin Income & Growth in 2009 and was joined by Ben Ritchie as co-manager in March of this year.
Data from FE Analytics shows that the trust has made 48.21 per cent over the last three years while the FTSE All Share has made 34.45 per cent. NAV has risen 43.3 per cent.
Performance of trust vs sector and index over 3yrs
Source: FE Analytics
While the trust has beaten its benchmark, it has returned less than many of the other portfolios in the sector.
Whitely says that one of the challenges he has faced is maintaining the high level of yield shareholders have become accustomed to – the trust was paying out more than 5 per cent when he took over.
Having a higher weighting to large caps has helped keep the yield high – it is currently 3.9 per cent – and at the same time has reduced the potential for capital growth somewhat.
The managers also write covered calls to boost the income on their portfolio. These proved especially useful over the past 12 months, thanks largely to a call they wrote over their position in Aviva which was booked this year.
The trust is trading around par, according to AIC data, while many other income portfolios are on a premium. It has ongoing charges of 0.62 per cent.
