Schroder Income duo avoid ‘extreme’ concentration in UK

Schroders’ Kevin Murphy and Nick Kirrage have moved their £1.1bn UK Income fund close to its maximum allowed overseas weighting to escape the “extreme” concentration seen in the UK market.

The portfolio can go up to 20% in non-UK listed equities, and at present is running with 15%, as well as 3% in fixed income opportunities.

“This is at the higher end relative to history as we think there are attractive opportunities outside the UK,” Murphy (pictured) said.

“Income concentration is extreme in the UK – the top 20 companies represent 70% of the FTSE All Share’s dividend paying stocks. As a result, you need to look for companies returning to the dividend register, or else growing their dividend from a very low base after cuts during the credit crisis.”

The fund holds a number of pharmaceutical stocks listed in the US and Europe, in an attempt to diversify its exposure.

“We hold Merck, Pfizer, and Eli Lilly which are also in the pharma sector but offer the same level of cash generation and dividend as the UK names,” said Murphy. “We have 20% in pharma, with 6% each in AstraZeneca and GlaxoSmithKline.”

There are opportunities in the UK as well however. One example of a stock that has just begun paying a dividend again after several years is housebuilder Taylor Wimpey.

“We have owned this stock for a number of years,” said Murphy.

“It does not fit with many people’s income fund bias as it did not pay a dividend until recently and it is a cyclical stock. It troughed in the market at 8p, against book value of 50p-60p per share, so at 8p there was clearly significant upside.

“Management has cut costs, disposed of the US division, and fixed the balance sheet. Taylor Wimpey is almost debt free as well, so management felt able to pay a dividend, which was initiated two weeks ago for the first time in five years.”

Conversely, Murphy said he is prepared to have zero weightings in stocks where he sees no value, including the top 20 names.

“AstraZeneca and GlaxoSmithKline in the UK are extremely attractive companies, but you only want 5%-6% maximum in those stocks, given what we have learned from the BP situation,” he said.

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