JO Hambro Capital Management's Clive Beagles has admitted the scale of the recent market sell-off has "surprised" the team running the £2.8bn UK Equity Income fund, with the falling share prices of cyclicals proving detrimental to returns.
Beagles said the flight to safety as investors became increasingly concerned about the global spread of the coronavirus and its potentially damaging impact on economic activity "provided a significant headwind to the fund's performance", as defensives performed strongly and cyclicals, banks and the commodity sectors fell materially during the month.
BP, Shell and Glencore are top five holdings in the fund at 6.8%, 5.3% and 3.8% respectively, while Lloyds and Barclays round out the top five at 4.6% and 4.2%.
Over one month, JOHCM UK Equity Income is down 11% compared to the 9.4% fall in its benchmark, the FTSE All-Share, the fund's fact sheet shows. The fund is also fourth quartile over six months and one year, according to FE fundinfo, down 23.5% and 23.3% compared to the 19.8% and 17% average losses in the IA UK Equity Income sector.
"We had two stocks specifically affected by the virus," Beagles commented in the latest fact sheet, which covers the month to 28 February.
"Firstly, small-cap Norcros [a bathroom product manufacturer] warned of supply chain issues from its China supplier base. The downgrade was around 5% while the shares fell about 30%.
"easyJet also predictably fell by a similar amount. We added to both. On the positive side, our UK construction names performed well while in contrast, other UK domestics like [top ten holding] ITV performed poorly."
Norcros is down 10.5% at £1.46 at the time of writing while easyJet is down 20% at £6.29.
Beagles, who co-manages the fund with James Lowen, added that while the coronavirus will "cause a soft patch economically" its impact "should be finite" and he remains confident in the yield potential of the portfolio.
"If the virus is not contained or slowed down by the onset of warmer weather, or a workable medical treatment, then perhaps we will see no earnings growth this year rather than the 7-8% that was previously assumed," he said.
"Nevertheless, our portfolio of stocks yields around 6.5% this year even with no growth. Our current live dividend growth forecast remains higher than our existing guidance of low single-digit growth.
"While we still think the growth and momentum bubble looks dangerous, in our world of value, stocks look extremely cheap to us.
"The polarisation between growth and value is now wider than it was during the TMT bubble and last August, when the performance differential last hit a wide point before value rallied. The gap is now unprecedented."