14th May 2015 13:33
LONDON (Alliance News) - Standard Life Equity Income Trust PLC's manager Thursday said it will focus on stocks it thinks are undervalued amid a backdrop of "stretched" valuations.
The trust provided a 12.8% diluted total return on net asset value in the first half of its financial year ended March 31, while its FTSE All-Share Index benchmark's total return was 5.3%.
The trust's share price total return was 5.7% as the discount at which the shares trade to net asset value widened.
Investment manager Thomas Moore of Standard Life Investments said the trust's NAV performance was due to "strength of various mid-cap holdings, combined with the avoidance of various underperforming large-cap stocks".
"The company's exposure to consumer-facing businesses boosted performance during the period," Moore said. "The company also benefited from its exposure to various industrial stocks."
"The company's performance benefited from its limited exposure to the Oil & Gas and Mining sectors at a time of widespread declines in commodity prices," Moore addded.
Moore said the investment manager is confident of the way the trust's portfolio is positioned and its ability to find opportunities at an attractive valuation.
"The company continues to favour consumer facing areas of the market, in anticipation of a sharp pick-up in domestic consumer demand resulting from a lower cost of living, higher employment levels and rising real wages. We view the lower oil price as a source of economic stimulus, lending a helping hand to the consumer and corporate earnings. We remain confident in the fundamental earnings and dividend outlook of our consumer related holdings to emerge in strong shape after a period of political uncertainty in the run-up to the UK General Election," Moore said.
That said, Moore sees some reason for caution for the wider UK market.
"In addition to ongoing geopolitical risk, the UK market may continue to suffer from mixed earnings momentum at the sector level, with ongoing earnings downgrades afflicting such sectors as Mining and Oil & Gas, which make up a significant proportion of the index. Furthermore, record low bond yields have lifted the share prices of many bond-like sectors," Moore said.
"These sectors appear to have become crowded with yield-seeking investors which has led to valuations that have become stretched in relation to underlying fundamentals. This situation has the potential to reverse quickly should a reversal in bond yields drive out the same investors. The above factors may constrain overall index progress, but should allow the benefits of our active process to become clear. Our approach is to remain focused on under-valued stocks with the greatest potential for positive fundamental surprise," Moore said.
Shares in the trust were up 0.3% at 419.12 pence on Thursday.
By Samuel Agini; [email protected]; @samuelagini
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