Axa’s Luckraft hails sales driven by high valuations

The manager of the Axa Framlington Equity Income and Monthly Income funds has taken profits from several of his holdings in the first few months of the year as UK markets reached and surpassed their pre-crisis highs.

However, he insisted equities generally looked cheap compared to “where the bubbles might be”.

“Last year was the transition from fear to greed,” Mr Luckraft said. “This time last year we hadn’t had the meeting of European bankers, which took place in July, where they managed to surprise on the upside. That really did change things.

“I’m sure there are going to be some small bubbles appearing somewhere, but we have not moved there yet.”

Mr Luckraft’s £140.4m Axa Framlington Equity Income fund underperformed its IMA UK Equity Income peer group’s average return in the one-, three- and five-year periods to April 23, according to data from FE Analytics, while the manager’s £91.5m Axa Framlington Monthly Income fund posted similar underperformance.

However, both funds compare more favourably to their FTSE All Share benchmark, the data provider added.

Mr Luckraft highlighted two “very poor” performers in his portfolio last year: London-based natural resources company Anglo Pacific and Norfolk-based office supplies firm Office2Office.

Anglo Pacific’s share price has fallen by a third in the past 12 months as the price of coke and coal have also declined; Mr Luckraft said Office2Office had taken market share from rivals but suffered from falling demand.

However, Mr Luckraft said he was sticking by his strategy – which involves investing a large portion of the funds in mid- and small-cap companies – in spite of the disappointing relative performance of his funds.

At the end of March, more than half of each fund was invested in companies listed in the FTSE SmallCap, FTSE Fledgling and FTSE AIM 100 indexes, according to the funds’ latest factsheets.

He said the small-cap end of the market had become “even more inefficient” than usual in the past five years, meaning he had been able to pick up more cheap stocks.

Mr Luckraft added: “It reminds me of the late 1990s. For three or four years, I had a horrible time, but 60 per cent of the portfolio was taken over by the end of that decade and I shot to the top of the performance charts.

“There is not the confidence there for mergers and acquisitions at the moment, but it will come at some stage. The fundamental positions of smaller companies are getting stronger. It is just annoying they are not getting recognised, but a lot of them definitely will.”

In spite of the funds’ poor performance, both portfolios are yielding in excess of 4 per cent, according to their latest factsheets.

Three small- and mid-cap companies George Luckraft is backing

Office2Office

Norwich-based office supplies firm Office2-Office is listed on the FTSE Fledgling index. The company has faced short-term demand issues, according to Mr Luckraft, which has driven its share price down by 29 per cent in six months and forced it to cut its dividend. However, the manager said a recent contract with Royal Bank of Scotland should lead the firm to a rebound in time.

Bond International Software

AIM-listed Bond International Software supplies specialist recruitment software and has had a strong start to 2013, gaining 6.7 per cent since the start of the year. Mr Luckraft says the firm has performed much better than expected by the market, adding: “I can see it easily doubling this year if it starts announcing big contract wins.”

Devro

The FTSE 250-listed food packaging company has seen its share price gain 3 per cent in six months but it has suffered since its February peak, falling 16.5 per cent in two months as the costs of raw materials rose. Mr Luckraft has backed the firm to bounce back, however, and it was one of the 10 biggest holdings in the Axa Framlington Monthly Income fund at the end of March.