Expectations of increased defence spending have seen the BAE Systems share price rise 10 per cent over the past three months.
Frost remarked that, ‘ The rally in defence-related stocks afforded us the opportunity to sell the remainder of our holding in BAE, where the yield is now only 3.5 per cent and growth in the dividend (which was modest anyway) will likely be constrained by obligations to its pension.’
Many large companies have pension fund deficits. These are caused by a range of factors including populations living longer and bond yields being historically low.
Companies may have to put more of their own cash into the pension fund to make up the difference, that cash might otherwise have gone to the dividend.
Frost continued, ‘Although some would note that November’s 1.6 per cent fall in the FTSE All-Share was the first negative month in nine, of more import to us was the change in tone caused by rising bond yields. This was a reaction to Donald Trump’s victory and the probability that policy will move to more of a ‘route one’ form of stimulus. It is seen as more inflationary and less bond market friendly. As a result, momentum in the UK market switched to the banks, insurers and miners at the expense of the ‘bond proxies’ of tobacco, consumer staples and pharmaceuticals. While this could set the tone for the coming years, it is worth remembering that Trump is not yet in office – and often the art of the possible is less than the rhetoric that precedes it.. We continued to reduce AstraZeneca and added to Aviva and RSA. Going against the grain of the ‘bonfire of the bond proxies’, we used weakness in RELX to add to our holding. While we must acknowledge that the shares have benefited in recent years from sitting in the slipstream of the bond proxies, we think the quality and durability of its cashflows are increasingly differentiated, not least through the opportunities from technology.’
He continued, ‘Thus RELX stands a chance of gradually putting distance between itself and the peloton.’
The Artemis Income fund has a yield of 4.1 per cent.