Wealth managers should be looking out for a turning point in the performance of high yield stocks, says Tineke Frikkee, manager of the Newton Higher Income Fund, a UK portfolio.

Many investors do not fully recognise the importance of cash-generative, solid and growing companies, argues Frikkee, who said it was unusual for high-yielding stocks, as measured by the FTSE 350 High Yield Index, to have underperformed the overall market in five of the last six years. This suggests, according to Frikkee, that we may be approaching a turning point.

One type of high yield stocks that Frikkee is especially bullish on are those within the pharmaceutical sector.

“In terms of fund positioning, we believe that we may be reaching a point in which those high yielding ‘steady eddies’ such as the pharmaceutical sector, which performed so well in the fluctuating markets of 2008, once again become highly prized by the market,” she says.

“It would come as little surprise should the market start to re-rate the pharmaceutical sector, as concerns over pharmaceutical companies’ patent expiries of blockbuster drugs dissipate, and focus on their cash generative defensive qualities returns.”

Athough she said the pharmaceuticals sector has been a huge laggard in share price terms over the last three years, Frikkee said the strong list of products coming through at companies such as GlaxoSmithKline, should lead to an eventual re-rating and reappraisal of the sector.

In contrast to her positivity on the high yield sector, Frikkee is concerned that low yield stocks remain very reliant upon commodity price rises, continual growth in Chinese demand, and strong cost control at the individual company level, as represented by the FTSE 350 Low Yield Index. Wobbles in these areas have already surfaced with a broker downgrade on Rio Tinto, and three rounds of Chinese monetary tightening in the past couple of months alone in an effort to rein in inflation, Frikkee adds.