Emma Wall: Hello, and welcome to the Morningstar series, "Why Should I Invest With You?" I'm Emma Wall and joining me today is Sue Noffke, manager of the Schroder Income Growth Fund.
Hi, Sue.
Sue Noffke: Hello.
Wall: So, there have been a lot of interesting drivers of U.K. equities in 2017, political uncertainty, the election, some rotation within the market. What have been the biggest contributors to the success of your fund so far this year?
Noffke: The biggest contributor has really been at individual stock levels. So, it has been the recovery in housebuilders in particular. From quite oversold levels post the EU referendum at the end of 2016 we held on to what were quite big positions and they have recovered very nicely, and they continued to grow their dividends. So, that's been a big tick in the box.
Another Brexit, kind of, fear recovery play has been our financials positions. So, in particular, our life assurance sector weighting. So, we've got quite a lot of individual names. We've got Aviva, Legal & General and Prudential, and they have all been recovery stocks during 2017.
Wall: A lot of the doubts and concerns of 2017 are not assuaged going into 2018. There's still a lot of economic and political uncertainty. But there also are some positive drivers. You mentioned housebuilders. We've had the budget recently which seem to prop up that sector. Are you feeling positive going into a new year more or less so than you have been over the last 12 months?
Noffke: Well, I think, we got to recognize that valuations are quite a bit higher. We have seen asset valuations and asset returns pretty buoyant in 2017. So, we are entering 2018 on the back of quite good returns really. And looking forward, I think, it is going to be harder to see double-digit returns. Having said that, we've got global growth that is positive, it's synchronised.
That's good. We have seen earnings growth this year; probably going to see moderations or slower growth but still growth into next year as well. So, I'm kind of a little bit more cautious going into 2018. I think the opportunities are definitely in the more value end of the market, but there are quite a lot of risks, too.
Wall: Looking down into the fund – you say stock selection has contributed to returns – looking at the sector level, you have got some plays there which have been arguably controversial over the last couple of years, big sector allocation to financials, energy, industrials. Why are you positive on those companies where some people aren't at all?
Noffke: Well, let's take each in turn. And if we take oil as the commodity play, and again, going down to which specific stocks we have chosen to invest in, is primarily Shell, and Royal Dutch Shell made a very audacious move at the back end of 2015 to buy BG, which was the exploration asset. And really the production side have been quite disappointing at BG and Shell bought it at just the right time for its production to start spurting. And it also got broadly the timing right in terms of the oil price.
The oil price was still falling through 2015 and really turned early in 2016 and we decided to up our weight quite significantly in that stock. We felt that the 8.5% dividend yield, which was uncovered by cash flow then, could be covered in due course by cash flow and we stressed oil prices, we stressed asset sales, we stressed the balance sheet. And actually, now it's yielding 6% and we think it can yield lower nor through cutting the dividend but through maintaining that dividend. That's been a really good investment for the fund.
Wall: And looking at financials then, because that is the largest overweight in your fund and it is one that has been controversial over the last couple of years?
Noffke: It has. The way in which we've built that financials position is quite interesting. So, it's not all banks. It's a lot of specialty financials, it's specialty property companies, it's specialty other financials, as well as holding a new group position in banks and then overweight it in life assurance. So, it's very much idiosyncratic individual stocks. And one of the positions that's really contributed to the fund over the time that we've held it, which is probably six years now, but particularly so in the last year, has been Intermediate Capital Group.
And it's probably not a household name for many people and it's got two business streams. It's been very successful in mezzanine finance, so that intermediate finance that the banks haven't been providing as they have retrenched to their core activities under regulatory scrutiny and it's also built up a fund management business. So, it's raised fixed capital money and it's been very successful doing that. Grown their dividend; it's a nice yielder and it's returned over 40%.
Wall: It's very much about stock selection then?
Noffke: Very much.
Wall: Sue, thank you very much. This is Emma Wall for Morningstar. Thank you for watching.
