PSigma Income Fund research update

The PSigma Income Fund was launched in April 2007, since when it has been a testing period for manager, Bill Mott. It is fair to say we have been disappointed with the fund's performance - with dividends reinvested it has returned -1.13% since launch, compared to a 14.2% gain for the FTSE 100 index (again including dividends)*. Bill Mott paid the price of purchasing bank shares in the initial months, and even though he quickly reversed his decision their falls still hurt performance.

Following the announcement of further quantitative easing (QE) last summer, markets rallied. The fund mainly invests in defensive, blue chip companies, and would therefore be expected to lag in a rising market. A major component of the fund, the pharmaceuticals sector, has been particularly disappointing over the past few months, with current holdings GlaxoSmithKline and Astra Zeneca both failing to find favour with the market.

Bill Mott, however, believes in an uncertain world, stable businesses such as Nestlé, enjoying good growth in emerging markets and with excellent potential for increasing dividends could still generate attractive returns for investors. If such defensives rally the fund should fare well, though conversely the risk remains that it could be left behind should the market be led by more economically-sensitive areas where the fund has a lower exposure.

The fund does have some exposure to more economically-sensitive areas such as the oil and gas sector. If inflation rises, he believes the sector could fare well because spending on energy tends to be less sensitive to rising prices.

To this end he has around 6% of the fund in Royal Dutch Shell, 5% in BP and 3% in BG Group. However, a relatively poor showing from a number of oil shares held in the portfolio has not helped the fund. For instance, BG Group suffered an 18% fall following results at the end of October with news of project delays. In addition, a 2% weighting in gold shares has performed badly. Although the price of gold bullion has held up relatively well, many gold stocks have suffered from company-specific issues such as rising costs and industrial disputes. When considering more economically-sensitive companies, Bill Mott looks at the attitude of management - he likes to see a focus on delivering cash to shareholders. Many of the relatively few firms that meet his criteria are in the oil and gas sector.

One of Bill Mott's qualities is his ability to predict the UK economy, although this has not been reflected in performance. He anticipates a weak, stuttering recovery, with growth likely to be around 1.5% annually. In fact, the Bank of England has recently revised its expectations in line with those expressed by Bill Mott several years ago. Where he has positioned the fund, in companies with good visibility of earnings, therefore seems the best place to be. However, according to our analysis, it is his individual stock selection which has been a detractor from performance.

Undoubtedly the last five years have been testing for fund managers. Bill Mott's record prior to his return to fund management with PSigma was exemplary and we maintain belief in his abilities. We do, however, share the frustrations of investors over the fund's performance and will continue to monitor the fund closely. The fund remains on the Wealth 150 list of our favourite funds across the major sectors.

Source: Lipper.* Figures to 01/01/2013.