Fund Review: Aviva Investors UK Equity Income

Strong investment beliefs and the exploitation of investors’ behavioural biases has helped the £948m Aviva Investors UK Equity Income fund outperform both its sector and benchmark across one, three, five and 10-year periods.

Established with the aim of providing an income above that delivered by the FTSE All-Share index, manager Chris Murphy notes the way the fund is run is less of an investment process.

“What I think is very important as an investor is to have some firm investment beliefs that create the foundation for the way you operate. So in different market conditions you have a solid belief structure that always reinforces and creates consistency in what you do. For me if you don’t have those foundations you can easily get thrown from pillar to post by the market.”

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A key part of the manager’s investment beliefs is the exploitation of investors’ biases, such as fear and greed, rather than rational decisions.

Mr Murphy explains: “If we look at the bubbles that have been created, that is often about greed. We want to exploit that [bias] by knowing it exists in other investors, but not chase it.”

Other areas of focus for the manager include the idea that companies all have a lifecycle – from start-up to growth and then fading to an average company.

“The importance of that is investors tend to over extrapolate companies in their growth phase and extrapolate growth into perpetuity and put them on too high valuations,” says Mr Murphy. “So when we look at businesses we try and be really aggressive in assuming it will fade and be a dull, boring business relatively quickly so we don’t overpay.

“People tend to forget that while dull, boring businesses aren’t glamorous or exciting, you can make a lot of money out of them.”

Taking a long-term view of the market, Mr Murphy identifies cashflow as a key driver, as that is where the dividends come from.

But Mr Murphy explains that he ties this in with the lifecycle of firms to create three “pods” that the portfolio can be divided into – growth firms, cash compounders and recovery plays.

“In terms of how the fund is structured, we don’t say there has to be ‘x’ in cash compounders, ‘x’ in recovery and ‘x’ in growth; it is really a function of what is attractive and cheap in the marketplace at the time. But, clearly for an income strategy, the middle ground of cash compounders is the most important part.”

Looking at the portfolio Mr Murphy highlights that the maximum weighting in any one stock in absolute terms is 5 per cent, although the further down the market-cap scale you go, the smaller the likely weighting. “I’m not going to put 5 per cent in a micro cap.”

The fund’s performance has been consistently strong across most periods, with the return of 102.31 per cent for the five years to January 29 2014 outperforming both the IMA UK Equity Income sector 101.26 per cent and the FTSE All-Share return of 100 per cent, according to FE Analytics data.