Fund managers are finding improved chances of dividend and capital growth among small- and mid-caps as investors look away from the biggest firms for sources of returns, according to Standard and Poor’s Fund Services.
“There has been an intentional shift away from the market’s concentrated income stream among multi national mega-caps. As a result, the average UK equity income portfolio exhibits a clear bias further down the capitalization scale,” said Peter Brunt, S&P Fund Services analyst.
In the UK at least, big-cap stocks have slightly lagged against the broader market in general. The FTSE All-Share Index has risen by around 4.9 per cent this year; the FTSE 100 Index of blue-chip stocks has risen by a slightly less degree, up around 4.4 per cent.
The S&P Fund Services’ update found that the top 15 names within the UK equity income sector, ranked by average fund holdings and the percentage of fund ownership, account for 45 per cent of the average equity income fund.
But it found that further down the rankings the level of variation increases dramatically, with the remaining 55 per cent of the average equity income fund spread across 600 names, giving managers much more chance to stand out from their peers, Brunt said.
The report said that Threadneedle manager Leigh Harrison, for example, has cut exposure to FTSE 100 companies, as the team has found more attractive yield and dividend growth prospects lower down the cap scale. He has also reduced financials exposure, largely on yield grounds.
Meanwhile, JOHCM manager Clive Beagles is one of the more optimistic managers, emphasising the distinction between the immediate prospects for the UK economy and UK plc, given that two thirds of UK listed companies’ revenues are generated outside the UK.
Beagles believes there are a number of good opportunities in overseas earners, such as Melrose and D S Smith.
In contrast, Tony Nutt of Jupiter’s High Income and Income Trust funds and Invesco Perpetual’s Neil Woodford remain cautious on prospects for UK plc in 2010.