Equities  

“We need to look at income more holistically”

Looking at the surge in assets under management since Thomas Moore took over management of the Standard Life Investments (SLI) UK Equity Income Unconstrained fund in 2009, you could be forgiven for forgetting that a crisis had seen equity investors run for cover.

Starting with assets of just £13m Mr Moore has seen the fund grow to £224.3m through increased inflows backed by consistent performance.

Mr Moore is clearly enthusiastic, not just about investing in general but in how an unconstrained approach to managing portfolios, including the Standard Life Equity Income Trust, can offer a different view on income investing.

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“We diversify more. We are avoiding the heavy concentration of other UK equity income funds to large-cap, slow-growth stocks. Instead, we are hand-picking the best of the best; the very highest-conviction ideas. Our process – and a 14-strong team – helps me pick the very best, highest-conviction ideas to make sure the portfolio is positioned to produce an exceptional experience for our clients.

“Our ability to add value as a house is greatest when we’re picking stocks because we are benefiting from the strength of our resources, so the fact the economic recovery is picking up momentum can only be a good thing, but we have shown since I took over the fund that we haven’t required some kind of blistering economic growth to achieve top-decile returns.”

He is also keen to point out the emphasis the fund has on the total return potential when building the portfolio, by looking beyond static dividend yields and outside the income stalwarts.

“We take a more holistic view to income investing and actually it’s not all about dividend yield. We will achieve 110 per cent as per the IMA mandate over a three-year period. That’s a given, but we don’t think that is enough; we don’t think investors should have to settle for just a better-than-average dividend yield because that neglects the power of dividend growth and capital growth.”

The approach, backed by the UK equity team’s investment process, which includes a “winner’s list” of the top-20 ideas, sees the portfolio having a minimum position size of 1 per cent and a maximum size of 5 per cent in any one stock.

“Because we have conviction in all of our names, by definition it’s a concentrated portfolio of typically 50-60 ideas at any one time. And because it’s concentrated and based on conviction levels, we’re not allowing the index to influence our thinking, so we can own just as much in a small-cap stock, if we have conviction in that, as we can in a large-cap stock.”

In the fund’s top-10 holdings – such as BT and Vodafone – traditional income stocks sit alongside small-cap names such as Cineworld, Staffline and Tyman.

“There is a huge consensus within the IMA UK Equity Income sector that it is a given among many UK equity income funds that they should hold these [traditional large-cap] stocks. I’m questioning that consensus… because we genuinely don’t believe these are the best top-10 ideas in terms of total return. They tick the box in terms of dividend yield but that’s not looking at income holistically; it is looking at it in a static time frame.