Emma Wall: Hello and welcome to the Morningstar series, Why Should I Invest with You? I'm Emma Wall and here with me today is Matt Hudson of the Morningstar Bronze Rated Schroder U.K. Alpha Income Fund.
Hello, Matt.
Matt Hudson: Hello.
Wall: So you have got quite a unique offering insofar as you can change the way that you manage the funds depending on market cycle, including a central income manager sometimes holding stocks that don’t even pay a dividend. So where are you positioned at the moment and what are your market views?
Hudson: Well as you know, my fund is pragmatic and uses the business cycle, which is why it's flexible and adjusts as we go through a cycle, but normally looking to own 50 to 60 stocks. So I will look for assets that have got a high-yield because I'm a premium income fund and I also will look for stocks that can deliver really good capital returns as well. And that's quite often in the recovery phase of the market to the point when you might own stocks with low or even zero yields.
The third element of the fund though is a focus on dividend growth stocks and really for me that's where we are in terms of the portfolio. That's the biggest element in the portfolio and the focus over the last six to 12 months, because we are later in the business cycle than we were in 2009 and 2011. Stock markets have recovered a long way from the bottom and actually economies have done very well as well. Only two years ago we were discussing would there be a recovery in the U.K., now we are debating how long it goes on for.
So to us and for my fund that means we should be moving later cycle into assets that have got some defensive growth characteristics and very importantly to me dividend growth, something we've been out to capture for the fund over the last two years or so.
Wall: I mean two hot topics in the income space at the moment are pharmaceuticals and banks. If I start with banks, obviously they are not so much dividend growth, is they are just going to start paying a dividend hopefully next year. Are you keeping an eye on those? Are banks on your radar?
Hudson: Well financials generally are a significant part of the fund. So, not just banks but also life assurance companies, fund manager groups and other financials. In terms of banks specifically, we do think that banks will go back on the dividend lists, so we will see Lloyds coming back over the next 12 to 18 months and we expect some other financials to increase their dividends as well.
So you will get a high-yield over the next couple of years. In some respects that is reflected in a couple of the share prices. My caution on the sector is more to do with the fact that the capital bases are still under pressure, the regulators require more capital to be owned. But in future I think we will see a more sustainable and a high-yielding element within banks.
Within financials more broadly we still find a lot of assets that we find interesting, let's say in life assurance and other fund manager groups and some of these companies are also delivering high levels of dividend growth as well. And as I mentioned before that's really important for my fund at this stage of the cycle.
Wall: Moving then on to pharmaceuticals, been a lot of change in this sector. Things have – they are still very much up in the air. That is a very defensive sector and that's something you said you were looking at, at the moment. Do you hold pharmas?
Hudson: I do hold pharmas. So my big holding in my Top 10 is Glaxo (GSK). And Glaxo is a business that has really struggled for positive earnings management over the last 12 to 18 months. But with the deals they have announced more recently, you start to see the portfolio improving, the growth characteristics improving, the dividends improving and of course at the same time you are getting a premium yield and a lot of dividend growth as well.
So it combines a later cycle defensive characteristics with a high-yield and with dividend growth and it's – as I say, it is a big asset within my fund.
Wall: That's very much the sweet spot then combining those two.
Hudson: Indeed.
Wall: Matt, thank you very much.
Hudson: Thank you.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
