The manager notes that in strongly rising markets “some of the upside in capital appreciation has naturally gone to the option holders”. But while many managers like to portray themselves as pure bottom-up stock pickers only, Mr Rees freely acknowledges that he spends “considerable time reading economic as well as stock research. This provides me with the confidence to see through short-term fluctuations in company performance”.
Therefore, portfolio turnover is relatively low, which he points out is a benefit given the attached call options, but stock weightings “can change markedly”. As an example, he points to significant overweights in GlaxoSmithKline, Vodafone and BT Group, which have been reduced after strong performances led to less appealing valuation outlooks. “In contrast, positions have been established in Sky Group and Carnival after periods of marked weakness as their prospects appeared more favourable than the market was assuming,” he adds.
Contributors to performance in the past year have included Legal & General and Aviva, as these firms started to “articulate their cash-generation abilities”. The manager notes he also had “more confidence than the market in ITV’s role within advertising and the potential recovery”.
But it’s not been all plain sailing, with Mr Rees noting a lack of exposure to the small- and mid-cap space and continued positions in the resources sector have weighed on performance.
He says: “This fund aims to produce steady returns, so it does not pursue a feast or famine approach to stock selection. Neither does it invest meaningful positions in the mid- and small-cap [sectors]. Clearly, these areas have led performance in recent years, although no longer appear cheap by historical standards.”
Martin Bamford, chartered financial planner and managing director, Informed Choice
This fund uses financial instruments, including derivatives, in an attempt to boost the yield generated from a portfolio of UK equity income stocks. Its historic yield of 7.58 per cent demonstrates the effectiveness of this strategy, although it should also highlight the risks investors face to receive this level of income. This is a well-diversified portfolio holding more than 150 stocks, and the ongoing charges for the clean share class look reasonable for running a more complex investment strategy. Investors considering this fund should take care to fully understand the strategies involved and the risks to their capital.