A Roy-oil affair: Newton's Frikkee looks to energy giants for yield

Tineke Frikkee, manager of the Newton Higher Income Fund, discusses recent adjustments made to the Fund against a backdrop of continued economic uncertainty.

"Over the past month or so we have made a few adjustments to the Fund," says Frikkee, "in order to take advantage of share price weakness, as well as companies entering our yield universe; stocks must yield more than the market average to be included in the Fund. In particular, we now have overweight positions in the oil majors Royal Dutch Shell (RDS) and BP*. It has been the oil exploration companies that have been the first to benefit from the significant unrest across the oil rich Middle East and North Africa driving the oil price upwards - pre-crisis, Libya produced around 1 million barrels per day, and this has been cut sharply. RDS and BP are also geared in to the oil price, although to a lesser extent than their exploration peers, and we would expect them to benefit too from such price rises." She continues, "Meanwhile, the natural disasters and subsequent nuclear tragedy in Japan have triggered increased demand for liquid natural gas (LNG), which in turn has prompted a rise in gas prices, benefiting RDS, in particular.

"In terms of the Fund's positioning, we have recently added to our position in BP; its share price has been weak of late, owing in part to issues surrounding its proposed alliance with the Russian energy giant Rosneft. However, its fundamentals look strong, and currently trading at 6.5 x earnings, it seems undervalued relative to its peers," Frikkee adds.

Bank holidays to banish retail blues?
"We have also initiated a new position in the insurer Prudential, while reducing the Fund's allocation to Standard Life," she says. "Prudential boasts significant exposure to Asian economic growth, and has recently entered the Fund's yield universe after it increased its final dividend by 27%. We maintain a neutral position to the life insurance sector as a whole."

Elsewhere, Frikkee continues to favour those defensive sectors such as tobacco, supermarkets and utilities. She explains, "We prefer supermarkets to food producers given the impact of high input costs, while the ‘big three' UK supermarkets - Tesco, Sainsbury's and WM Morrison Supermarkets - are now all delivering above-average dividend growth, with Tesco and Morrison's growing theirs by over 10%.

"Meanwhile, we do still have some consumer-facing stocks, which have struggled of late but for which we believe earnings expectations are now at a more rational level. Halfords is a prime example of this, and we expect the back-to-back Easter and Royal Wedding weekends to be a welcome boost for business," Frikkee adds.

"While we continue to find attractive investment opportunities, there is no doubt that significant underlying economic issues remain. If, as expected, interest rates are raised this year, then this, coupled with public sector cuts - the brunt of which are yet to come - is likely to have a significant detrimental effect on consumption," she says. "We would describe our view as one of cautious optimism, with greater emphasis on ‘cautious'. As such," Frikkee concludes, "we will continue to seek to invest in those companies boasting stable cashflows, strong balance sheets, and sustainable and attractive dividend yields."

* Source: Newton, 26 April 2011. Portfolio holdings are subject to change at any time without notice, are for information purposes only and should not be construed as investment recommendations.