Fund Review: JOHCM UK Equity income

The £2.5bn JOHCM UK Equity Income Fund aims to outperform the market on a total return basis and, where possible, to deliver a growing dividend income.

Co-manager Clive Beagles explains: “We are a fairly traditional equity income fund. We do embrace a strict yield discipline, so each and every stock in the fund yields more than the market average on a 12-month prospective basis.”

All stocks in the portfolio yield at least 3.2-3.3 per cent looking forward to the end of 2014, he says. Compared to other income strategies, however, they are “much more open-minded” about the stocks they are prepared to own.

Article continues after advert

“We find ourselves often drawn to many recovery or turnaround situations that happen to yield a lot because the shares have not performed very well, rather than solely focusing on a certain narrow list of sectors like tobacco, utilities, pharmaceuticals. Clearly there’s very much a contrarian bias to what we do,” says Mr Beagles.

Macroeconomic factors do have some bearing on stockpicking and sector allocation, although they are not the prime focus. In 2013, Mr Beagles and his co-manager, James Lowen, favoured UK domestically orientated stocks, partly because they felt the economy was improving, but mainly because valuations were “very modest”.

Scepticism towards these stocks has faded significantly, leading to rising share prices and valuations. “I am not saying that it’s all over in domestically orientated UK or developed world stocks, but clearly there’s less valuation upside and stocks require a strong earnings performance, which I think will happen, but in some cases may not happen fast enough,” explains Mr Beagles.

The fund’s valuation and yield disciplines have forced them to take some money out of some of their more domestically orientated stocks, for example, Restaurant Group, owner of Frankie and Benny’s; Close Brothers, the UK bank; and Marshalls, the UK building materials company.

On the other hand, after three or four years of being very underweight in stocks and sectors biased towards the emerging markets, predominantly mining and consumer staples, the managers started adding mining companies Glencore and Rio Tinto in the second half of 2013. These two stocks now account for close to 6.5 per cent of the portfolio.

Mr Beagles expects the pace of the shift away from more developed world-orientated stocks in favour of stocks exposed to emerging markets to be a topic for discussion in 2014. “Our style is ‘early in, early out’; we are happy to be earlier than the herd if we are getting good valuation entry points and a decent dividend yield to give us compensation,” says Mr Beagles.

Mr Beagles attributes the strong performance of the fund to success in using ‘bottom-up’ company fundamental factors in stockpicking work. In the five years to January 30, the fund returned 164.42 per cent compared with an IMA UK Equity income sector average performance of 101.51 per cent and a FTSE All-Share total return index return of 101.67 per cent, according to data from FE Analytics.