M&G fund manager Stuart Rhodes is holding an overweight position in "distressed" energy sector for his £6.4bn Global Dividend fund as they experience an uptick in demand.
The manager (pictured) has 20% invested in energy-related stocks which is focused on energy infrastructure, petrochemicals and energy services.
Energy has significantly underperformed recently with the S&P 500 Energy index returning 13.4% over three years to 3 January, according to FE, versus returns of 56.8% by the S&P 500.
Speaking at an investor outlook, Rhodes said energy stocks had started to decline while demand for energy was going up following the decline in the oil price in 2014/15, particularly outside of OECD countries.
"There are lots of investment opportunities in energy, they are trading at distressed levels but are still attractive in terms of the dividend. Energy is a very interesting area.
"We particularly like services, petrochemical and infrastructure companies but dislike exploration and production companies as they do not pay a dividend."
He particularly namechecked a a $23bn Canadian petrol and natural gas company called Pembina which he said had a 5.5% dividend yield which was a "very attractive starting level".
Elsewhere, he said he was avoiding "sexy areas" of investment such as electric vehicles which he felt were approaching "frothy" levels given the volume of discussion surrounding them.
Meanwhile, Rhodes said he was "disappointed" by the performance of some of US companies during 2017. The US is his largest geographical weighting at 53.9% and he holds US healthcare firm Unitedhealth Group, financial Wells Fargo, technology firm Microsoft, semiconductor firm Broadcom, insurance firm Arthur J Gallagher and manufacturer Trinseo in his top ten holdings.
Although he does not hold them, he noted 2017 saw poor performance particularly for food companies Kellogg's, Campbell's, Kraft Heinz and General Mills. While they had enjoyed positive performance for several years, they began to be de-rated by investors in 2017.
He said: "These stocks had enjoyed strong share price performance for several years, in spite of their materially weakening fundamentals - expectations for revenues and profits have been revised downwards continually driven by weak consumption trends and increased competition, among other factors.
"In my view, investors had been willing to pay an excessive premium for the perceived safety of certain household names, irrespective of the fact that the stable growth they have relied upon has been under increasing pressure.
"In 2017, though, market participants finally started to pay attention to these businesses' financial performance and started to de-rate them, even though the trajectory of their performance has by no means suddenly changed. The process of recalibration may have a lot further to run."
The M&G Global Dividend fund has returned 47.5% over three years to 2 January, according to FE, versus returns of 43.8% by the IA Global sector.
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