LONDON Gartmore's UK Equity Income Fund is betting on blue-chip names that have so far lagged the explosive stock market rally and offer strong dividend yields.
Fund manager Dan Roberts said the recent market rally, led by cyclical stocks, had thrown up huge valuation anomalies allowing investors to take advantage of cheap blue chips.
"It's a bit like getting designer goods at Primark prices," said Roberts. "Some very good quality names with strong balance sheets have been left behind and have performed relatively poorly in the recent rally."
Roberts said investors can construct a "very sensible" portfolio with some of these companies that yield 4.5 percent against a market yield of below 3.5 percent and a two-year gilt yield of below 1 percent.
Roberts started running the Gartmore UK Equity Income Fund in July after joining the firm from Aviva Investors earlier this year.
He picked out GlaxoSmithkline Plc (GSK.L) and Astra Zeneca Plc (AZN.L), which yield 5 percent, as top buys as well as industrials company Smiths Group Plc (SMIN.L) and utilities group Centrica Plc (CNA.L) which yield 4 and 5 percent respectively.
"These are not distressed companies -- these are strong companies, so they weren't sold aggressively into the downturn ... The flipside is they have lagged the market quite significantly as equities rallied aggressively," he said.
Roberts highlighted the risk-return profile between high quality stocks which have underperformed the market and lower quality plays he said have led the near 40 percent rise in the FTSE 100 .FTSE since March 2009 lows.
"The risk-return trade off is very interesting. When everyone is chasing recovery stocks and buying cyclicals, it is a great opportunity to invest in some of these less sexy companies.
"Normally, I get my yield from lower-quality companies with the standard kind of risk-return trade off. But now, I can actually invest in a company like Diageo (DGE.L) and pick up a 4 percent yield while doing so."
(Editing by David Holmes)