Hello and welcome to the Morningstar Series, Why Should I Invest With You? I am Emma Wall
and I am joined today by Matt Hudson, Manager of the Schroder UK Alpha Income Fund.
Hi, Matt?
Good morning.
So I thought, we'd start by talking about a little bit of the backdrop in which you
are investing. The U.K. is one year ahead of the Europe in terms of recovery and one
year behind the U.S. So we're moving now into a more sort of sustainable growth or targeting
sustainable growth. Are there particular companies – particular sectors that do better in this
sort of part of the cycle than perhaps did in the recovery?
Well, absolutely. Certainly coming into 2009-2010, we went through a recovery phase when the
type of companies that performed really well were those that have probably suffered the
most during the financial crisis.
So that was a portfolio or a group of stocks that were really very cyclical. Where we are
now is, we are in a later stage of expansionary period. We're seeing positive growth rates,
but those growth rates are not accelerating as they were a couple of years ago. And the
type of stocks that tend to do well in those periods are businesses that are exposed to
the cycle, say, exposed to growth but have some longer term structural growth dynamics.
So they maybe outsourcing companies or they may be providing support to other businesses
or in some cases they maybe place on the capital investment cycle because of course as that
growth continues you'll see companies wanting to invest, whether it's in hard assets or
maybe just advertising a little bit more. So the type of stock that sit within the media
space or another area that is very appropriate for the type of market that we're in currently.
Talking about CapEx. One of the things that we traditionally see in this part of the cycle
is M&A, it's beginning to pick up but it's not quite where we would expect. I think you
said recently this is because until we are sort of on a par within developed markets
of Europe, U.K. and U.S. confidence isn't really going to be there. But perhaps next
year M&A should start to pick up and that should be a consideration?
Yes. Well, we've seen some big deals and we've seen a lot of rumored big deals, haven't quite
happened yet. But we are starting to see that M&A that expansionary phase coming through
and you'd expect corporates to respond to sort of weaker top-line growth by doing M&A.
One of the areas that we think still could fire, so we could be more positive is in capital
investment. That has improved in 2009-2010, but the last couple of years it has faded
slightly. Now, we see quite a strong environment in terms of the residential investment cycle,
so in houses we see that, that's been quite strong for a while now. But we are beginning
to see corporates investing in offices, in more productive capacity. So it's a broadening
out of the trends that we've seen over the last couple of years; away from residential
and more into commercial as well. And that again is a very much a later cycle phenomenon.
Of course, all this as great backdrop, you are an income investor, so as well as having
all these fantastic fundamentals and considering the market cycle movements you've got to think
about where you're going to find investors income. And I know you've warned in the past
about investors sort of being magpies for high yield because that's just not a sustainable
investment strategy, is it?
Well, I think, there is always some tractions around high yield stocks and of course for
their premium income fund then we need to have a certain allocation to that. But the
way I would think about that is to have a portfolio that's solely concentrated on those
stocks, risk even missing out on the growth, which is really starting to come through or
potentially keep investors stuck in a certain group of stocks which may have originally
had quite lot of yield, but don't anymore.
And that's why having a pragmatic approach is very important. And for my fund and for
my investors what I try and do is I try and capture an element of premium yield because
it's a premium income fund, an element of capital returns because we are investing in
equities relative to other asset classes there, the higher risk so when things are going well,
you want to be rewarded for that, capital returns. And also dividend growth, and dividend
growth is critically important to me. That what is – that really unlocks the equity
income story at the moment.
So those three elements; high yield, capital returns, and dividend growth are the three
characteristics that we are seeking to capture for the fund. Of course, over time the balance
between those three will move, depending on where the opportunities are. But we've always
going to allocate into those three rather than just staying completely wedded to a bunch
of classic income stock that most of us been very familiar with.
Matt, thank you very much.
Thank you.
This is Emma Wall for Morningstar. Thank you for watching.