A number of investors have used the recent market falls to buy shares at lower prices but Jacob de Tusch-Lec, manager of IC Top 100 Fund Artemis Global Income (GB00B5ZX1M70), has not joined them.
"For the first time in about five years I have not been buying the dips," he says. "There are a lot of very attractive valuations in the market but I would say those are based on a belief that there will not be a hard or semi hard landing in China, and that we won't get a policy mistake in the US, whereas I think the jury is still out on that one.
"Mining and energy stocks, and ones with exposure to Asia, are cheaper than they've been for a number of years and now could be a good entry point. But I still think the next six months could be quite volatile and that there has not been any reason to add risk to the portfolio. However, we have been doing work on some of the things that look cheap."
Mr De Tusch-Lec previously bought into dips on the basis that monetary stimulus would continue to push things higher, and the fund is overweight Europe where monetary stimulus is continuing. "I think Europe looks relatively interesting based on valuations and because we have monetary stimulus: the European Central Bank is doing quantitative easing into next year, and maybe further if the economy doesn't actually start growing.
"But I am very underweight the US where I think valuations are excessively high, and you have the potential for monetary tightening and a pretty big slow down in economic growth."
In response to this he is holding few US 'bond proxies,' real estate investment trusts (Reits) and utilities, and in this region has more cyclical exposure, examples including General Electric (US:GE) and auto parts manufacturer Johnson Controls (US:JCI).
"In Europe we have a lot of bond proxies, which basically plays on the fact that they will print money and rates will stay low for a while," he explains.
He adds that in Europe you do not pay as much for quality and there are some small pockets of value and interesting themes. These include infrastructure so the fund has a holding in Spanish listed Ferrovial (FER:MCE), which has four business lines: services, toll roads, construction and airports - including some in the UK.
He has exposure to Italian telecoms and holdings include Rai Way (RWAY:MIL) which runs a signal transmission and broadcasting network, and accounts for 2.1 per cent of the fund's assets. "These are very defensive areas with long-term contracts but the flip side is that there is very little growth in these assets," he says. "It is very hard to find high-yielding, safe assets that are also growing at a decent valuation."
He is not prepared to pay over the odds for a share. "You are losing the cushion of valuation safety - things can de-rate quite quickly," he explains. "My portfolio still trades on a price earnings ratio (PE) of roughly 13.5x forward earnings, which against a global benchmark at around 15.5x is a nice discount. We are still looking for lower beta assets with good dividends, but I think the global economic outlook is not that bad yet, and we haven't had a level of stress in the system high enough to make us forget about valuations and buy the best companies in the world that are trading often at more than 20x earnings."
And he doesn't think things will necessarily be better for income shares. "The sell off has been quite broad based and income stocks are not that immune because US interest rates are expected to go higher over the next 12 to 18 months, so the attractiveness of a US income stock might go down relative to other asset classes," he says. "The big area of concern is where will the volatility come from? A lot of income stocks, for example within the food and beverage sectors, have a large exposure to emerging markets so we have come back to a macro driven market where stock specifics are often overruled down by top down considerations."
Jacob de Tusch-Lec CV Jacob de Tusch-Lec has managed Artemis Global Income Fund since its launch in July 2010. He also runs the recently launched Artemis Global Equity Income Fund (GB00BW9HLL39), and is co-manager of Artemis Monthly Distribution (GB00B6TK3R06). Between January 2006 and June 2010 he managed Artemis Capital Fund (GB00B2PLJM64). He has also worked on pan-European equity strategy at Merrill Lynch. Mr De Tusch-Lec has a BA and an MSc in economics from the University of Copenhagen, and an MBA from Stern School of Business at New York University. |
Artemis Global Income's portfolio holdings have either a very good long term dividend, or good dividend growth prospects, with the aim of both a rising income and an attractive yield.
Examples of a company with the potential to grow its dividend include technology company Apple (AAPL:NSQ) which yields just over 2 per cent. "Apple is in the portfolio not because of the level of the yield, or even the quality of the yield - we don't know where Apple is going to be in ten years from now - but the dividend growth prospect is absolutely amazing," explains De Tusch-Lec. "The company has $150bn plus in cash outside of the US: that could result in special dividends and share buy backs, and massive dividend growth on top of that."
More traditional income plays include Israeli telecoms company Bezeq (BEZQ:TLV). He says: "It doesn't really grow the dividend out of ordinary business, but rather out of asset sales and financial engineering. So I don't expect it to give us organic dividend growth. But a dividend yield higher than 8 per cent? I'll take that."
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Watch Leonora Walters interview Jacob de Tusch-Lec in our video interview.
