The Analyst: Retail and natural gas stocks set to soar

With so much doom and gloom around, I thoroughly enjoyed my recent meeting with Clive Beagles, the fund manager of J O Hambro Equity Income fund. He is far more upbeat than most and has been for quite some time. And I have to say he has generally been right too.

What Clive Beagles is witnessing is a strong pick-up in dividend growth in 2010, and he points out that many companies' shares are yielding as much as, or more than, their corporate bonds. For example, Vodafone yields 5.1 per cent, similar to its corporate bond yield; and GlaxoSmithKline has a dividend yield of 5.2 per cent, (which is expected to grow by 10 per cent, during 2010) but a corporate bond yield of only 4.75 per cent. While I am not yet bearish on corporate bonds, Mr Beagles notes that equity dividends are growing whereas bond coupons cannot. So the argument for high-yielding shares is compelling if you are looking at generating superior total returns over the longer-term.

Mr Beagles expects much of his portfolio to see strong dividend growth this year and for some companies to pay a maiden dividend, or to reinstate one previously cancelled. An example is Cape, a company that provides services to the energy industry. It has a 58 per cent market share of the UK power generation maintenance market and has made important expansions into liquefied natural gas facilities in Australia and Qatar. The company is about to pay its first dividend for 10 years. He believes the shares are undervalued, and that there is a good chance of the share price doubling from the present level.

Clive Beagles is real contrarian. At present many people wouldn't even be looking at consumer related stocks such as cruise operator, Carnival. Yet it has seen a strong increase in bookings recently and he believes the outlook for consumer spending isn't as bad as many fear. However, fear in the market brings opportunity and he believes the current valuations of certain retailers, such as Debenhams, is simply wrong. He accepts there may be a decline in sales, but not to the extent implied by the current market valuation. He also favours Marks & Spencer, where he anticipates a change in management will bring a greater focus on food halls, which could feed through to the bottom line.

Unusually for an income orientated fund, there is a healthy weighting of smaller companies. This is usually beyond the scope of the larger funds in the sector because they can't buy enough stock to provide meaningful exposure for investors. However, there are plenty of small cap names paying good dividends, and they often have superior potential for capital growth compared to larger firms. Presently included in Clive Beagle's portfolio are Morgan Sindall, Kcom and Severfield-Rowen, all of which are on single-digit PEs and he believes have plenty of upside.

Interestingly, unlike many income fund managers, he remains quite cautious on many defensive areas such as utilities. He believes the sector is far too indebted and carries the dangers of windfall taxes. Similarly in tobacco, another popular area for funds in this sector, he sees large increases in excise duty causing pressure on sales. Mr Beagles believes this area is a soft target for governments wishing to raise revenue, illustrated by Japan's recent 40 per cent cigarette tax increase, and he is avoiding the area altogether.

So here is an income fund manager with a more contrarian flavour than many in the sector. It will therefore dovetail well with Neil Woodford's income funds, which have a completely different leaning. Mr Beagles is far more upbeat than Mr Woodford on the subjects of unemployment and household disposable income, so if the economic outlook improves his fund will benefit. I'm not sure who is right in their prognosis, but with a yield of 4.6 per cent and performance in the top decile since launch, this is not a fund you should ignore.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about funds in this column, click here