When screening for possible share purchases, why not pick the brains of the city's elite fund managers?
All of us stock-pickers know the importance of the initial screening process in arriving at a short list of candidates for share purchase. Some of us are oriented toward a value filter such as price to book, others look to growth or low debt. But most of us apply a range of filters to reach our final decisions. I reckon an additional filter may be to analyse the top ten holdings of some of the best city fund managers.
The top ten holdings in an investment fund are often almost half of its total assets. They are "must have" shares, for the manager, but not necessarily "conviction" buys. This is because of the lamentable tendency for active managers to "hug" a benchmark, such at the FTSE 100 index, against which they are measured.
Don't hug the index
Fortunately for those of us who wish to use fund manager knowledge some sectors are less prone to index hugging than others. One such is UK equity income, where the manager is mandated to choose stocks yielding more than the index. So their top ten shares will not necessarily be the ten largest on the market. And if they are, they may not be held in the same proportions as the index.
For this exercise in share screening I therefore took a look at the UK Equity Income and Growth Sector of investment trusts. I chose investment trusts because I happen to like their generally lower costs and closed end status. I excluded any trusts with a split capital structure.
An analysis of four top funds gives some useful ideas for the top picks for an income portfolio.
The Fantastic Four
I used Trustnet and chose the top four investment trusts over three years that had been awarded "three crowns", Trustnet's highest accolade. The funds were: Standard Life Equity Income Trust (LSE: SLET), Perpetual Income and Growth (LSE: PLI), Edinburgh Investment Trust (LSE: EDIN) and City of London Investment Trust (LSE: CTY).
I then ranked their top ten selections according to their percentage of the portfolios. This process yielded 18 shares (one was excluded because it was a US company).
The table below shows the 17 shares, their "vote", in terms of summed portfolio percentages, and the number of portfolios in which they appeared. Historical and forecast dividend yield is from digitallook.com
All in all, I don't think it's a bad list to sanity check your other screens. I certainly wouldn't quarrel with the top ten, with the exception of BG Group.
Nevertheless, bar Imperial Tobacco, the top ten shares chosen are also in the top ten of the FTSE 100. The next seven selections are a little more diverse, meaning they possibly represent some 'conviction' buys and are worthy of further examination.
In general these 17 shares tell us that these top managers are investing in defensive shares, predominantly oil, resources, pharmaceuticals, tobacco, telecoms and utilities. There is no sign of general retailers, media or support services. But then, if you're after a rising income, why should a cyclical business with fluctuating earnings feature in your top ten?
Using monthly fact sheets as a source of ideas
The rankings I have used are based on the portfolios at the last reported date. Fortunately a lot of these fund managers are kind enough to publish a monthly factsheet updating us on sales and purchases.
The Standard Life investment trust only issues a quarterly fact-sheet -- the manager recently bought Hammerson (LSE: HMSO) and Drax (LSE: DRX). Perpetual Income Growth issued an update at the end of April, where the manager was inclined to "favour sectors such as tobacco and utilities".
Neil Woodford of Edinburgh investment Trust told us in his last fact-sheet he had bought GlaxoSmithKline and BAE Systems (LSE: BA). And finally Job Curtis of City of London Investment trust reveals in his May fact-sheet that he bought Centrica.
It's just a thought, but if you're looking for ideas for your next monthly share purchase you could do worse than consult one or more of these fact-sheets. After all, they're putting a few million pounds more money on their ideas than many other tipsters. I'm not suggesting they replace your own careful analysis, but that they form part of it.
> Disclosure: Tudor owns all the shares and funds mentioned above except for Standard Life Equity Income, Hammerson, Rio Tinto, Provident Financial and Drax.
I'll keep an eye on these guys and their purchases and, if it looks interesting, I'll provide an update next month. In the meantime another source of investment ideas is The Motley Fool's Champion Shares premium stock picking service. Click here for 30 days of free access to all its current buy recommendations.
