UK equity income fund managers still see opportunities at home

While increasing numbers of fund managers have shifted their focus to companies that derive significant earnings from outside the UK, some remain sanguine on prospects closer to home, says Standard & Poor's Fund Services in its latest sector review.

"There are several managers that feel opportunities still exist among more domestically focused companies," said S&P fund analyst, Peter Brunt. James Lowen at JOHCM, for example, feels quite positive on the prospects of growth in the UK, stating that most companies his team has seen are predicting sales growth in the next year. He also believes the situation with unemployment is better than the media portrays, highlighting the fact that although the government predicts cuts of around 300,000 over the next three years, the same number has been created in the last year alone. As a result, DS Smith, Close Brothers, Hayes and TUI Travel are among some of the more domestically focused names currently held in the S&P AA rated JOHCM UK Equity Income Fund that he feels optimistic about.

While Ciaran Mallon, manager of the S&P A rated Invesco Perpetual Income & Growth Fund, favours stocks such as HSBC for their emerging markets exposure, he is also increasingly positive on the UK economy and has recently bought a number of more UK-centric names, including Morrisons and Northumbrian Water.

However, Mallon's view is not entirely shared by his colleague Neil Woodford, who remains incredibly bearish on the UK economy. Woodford continues to favour companies with overseas earnings, in the face of the UK's current low-growth environment.

This is a sentiment echoed by most managers in the sector. "Many companies cut costs to the bone in response to the credit crisis to maintain profit margins, and some now question its sustainability," points out Brunt. "As a result, many managers have shifted towards companies with significant earnings from outside the UK, in particular from emerging markets."

This is nicely illustrated by LVAM's Graham Ashby, whose portfolio is heavily invested in companies with more than 50% of their revenues deriving from outside the UK. Names include mega-caps such as BP and Vodafone, both widely held by funds within the sector, which derive less than 25% of their revenues from the UK. Further down the cap-scale, he also holds Rolls Royce, Royal Sun Alliance and Standard Chartered Bank, the latter being favoured by a number of managers, including UBS's Brian Gallagher and Insight's Tim Rees, for its emerging markets exposure.