Lincoln Income Trust positioned for difficult UK market

The Lincoln Income Trust is positioned for slowing economic activity and stockmarket volatility in the UK this year.

But despite the uncertain outlook, Lincoln believes that with stock valuations around the lowest for 10 years, now is an opportune time for investors to get into the equity income sector.

Russell Mackie, the manager of the trust commented “We have held up pretty well in the bad periods such as over the last month and through the fourth quarter of last year.” The Income Trust has outperformed its peers in the UK Equity Income sector over one and three years. The Trust is 36th percentile over one year and 41st percentile over three years in its sector.

Lincoln expects the UK to continue to see economic difficulties this year following a slowdown in consumer activity over the last quarter of 2007 driven by higher energy bills and food prices, falling house prices and reduced availability of credit. These factors will have a knock-on impact upon consumer demand in 2008. Worryingly, the UK’s growing current account deficit was at 5.7% of GDP in the third quarter of 2007, which was worse even than the equivalent figure of 5% for the United States.

However, Mondrian Investment Partners, which manages the trust on behalf of Lincoln, is finding particularly good value in UK blue chips, having raised exposure to them over the last few months. While the mid cap stocks are more exposed to a domestic slowdown, large caps such as oil, pharmaceuticals and banks have a high proportion of overseas earnings, which are set to be boosted by a recovery in the undervalued dollar.

Demand from both emerging and developed markets will buoy demand for oil, while problems with refining capacity will keep prices high for some years. But stock-picking is still essential in the oil sector; while several companies will do well over the next two or three years, it is those companies with access to fields with the best reserves that will outperform over the longer term. The Income Trust has overweight exposure to BP and Royal Dutch Shell.

UK banks now look cheap after a tumultuous year. Price to book values are just 1.5 times versus 2.5 times for the whole UK stockmarket. UK banks may see further price falls over the next one or two years, but they are now at all-time lows in terms of valuations, with yields for the industry around 6-7%. Mondrian favours HBOS, Royal Bank Scotland and Lloyds TSB; these companies are well positioned to pick up business from Northern Rock, do not have significant sub-prime exposure and are well diversified.

The Income Trust uses a long term valuation strategy, applying a rigorous dividend based model that identifies value in terms of the long-term flow of income. Dividend yields and future growth potential play a central role in the investment process and over time the dividend component is expected to be a meaningful portion of the expected total return. Key to the stock selection process is fundamental company analysis and a regular programme of meeting companies.

Russell Mackie commented: “We feel very positive about the Income Trust because its defensive characteristics mean it is well positioned overall to take advantage of a slowdown in economic activity and market volatility. We expect its defensive characteristics to bear fruit through 2008 while UK equities generally now offer very good value for the long term.”

Will Hale, Head of Distribution at Lincoln Financial Group, commented: “Mondrian's consistent and highly disciplined investment process is ideal in the current economic and stockmarket environment. The Income Trust is designed to outperform its peers when the market falls whilst capturing virtually all of the upside in rising markets. This approach aims to deliver great performance in the long term, as well as much less volatility compared with many other UK funds. Over the last year we have seen the benefits of this approach.”