InvestmentsFeb 10 2014

Fund Review: JOHCM UK Equity income

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by

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.

“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.

The big winners for the fund over the past 12-18 months included ITV, 3i and TUI Travel, which owns Thompson and First Choice. A consistently overweight position in mid and small capitalised stocks has been rewarding, particularly in the past couple of years as many are domestically orientated, adds Mr Beagles. In the past six months, the fund’s exposure to larger capitalised stocks has increased, although it remains underweight there. The fund’s few challenging stocks have included RSA, which has disappointed.

Looking ahead, Mr Beagles expects 2014 to be a more challenging environment, with worries about monetary stimulus being withdrawn. He expects market returns to be less strong, although earnings will come through, particularly in developed world stocks relative to expectations.

This fund’s strong performance track record combined with a clear investment process and significant assets under management make it a compelling choice for investors looking for an alternative in the UK Equity Income sector.

EXPERT VIEW

Geoff Mills, managing director, Rayner Spencer Mills:

VERDICT:

“It is important that in a range of funds delivering income, the source of income is well diversified. The team at JOHCM treat yield discipline as a significant part of the stock selection process. This has the effect of making the fund one of the more contrarian in the range of funds we believe are strong investments. This also forces a strong sales discipline, with a yield above the FTSE All-Share an important part of the evaluation. The team at JOHCM are small but input is not restricted to the two portfolio managers as they encourage wider team debate. Given the income focus of the fund we feel this fund can be used as a core selection for an investor’s portfolio.”