Jack Barrat also made the move from Matterley to co-manage the £78.9m fund alongside Mr Dixon. Their aim is to achieve a superior yield to the FTSE All-Share and to grow that yield. “We think the best income generators are established businesses with very strong finances,” Mr Dixon says.
The managers believe they approach the notion of an income fund “slightly differently” from other offerings because they do not necessarily consider dividend yield as their “starting point”. Mr Barrat admits that the search for yield is “very in vogue”, but that they place more emphasis on a company’s ability to pay its dividend.
He says: “Its ability to pay its dividend or to distribute cash to shareholders is made up of the outlook for the company in general, the free cashflow generation of that company and, importantly, the management’s ability to be good custodians of capital. [So] we trust them with the free cashflow generation from the corporate to either distribute that cash to shareholders in a responsible way to be able to maintain the dividend or, if they have investment opportunities within the business, to reinvest it in the business.”
There has been a bit of movement in the portfolio recently, with some rotation among insurance names and the realisation of profit in some of its real estate holdings.
A bid approach for Brit Insurance earlier this year prompted the managers to rotate out of the stock and into Admiral Insurance. Mr Barrat explains: “The reason we like a company like Admiral is we think that cash generation is absolutely sustainable at this level in the UK business and there’s some quite exciting international growth as well. So we think the starting point is a 6-8 per cent yield.”
Mr Dixon adds: “What we’ve seen is there’s been a huge following for the real estate sector. If we rewind one year it was a sector that was trading at a reasonable discount to asset value – very attractive yields relative to fixed income. [But since then] the yield has fallen well below market averages, which is very rare to see the companies trading at less than market yield.”
This has forced the managers to look at unfashionable areas of the UK market, such as the resources sector. Mr Dixon concedes: “Where we can find businesses that are very cashflow positive at the current price juncture, profitable and also incredibly well financed, we’re happy to spend our money. Now I would highlight these opportunities are quite rare [in resources].”
The fund is placed at level six out of seven at the riskier end on a risk-reward spectrum, with ongoing charges of 0.95 per cent applied to the clean class C professional accumulation shares.
The fund has continued to outperform its peer group and benchmark respectively since the managers took over the portfolio. In the past 12 months to March 23, it returned 12.03 per cent to investors, compared with the Investment Association UK All Companies sector average of 8.92 per cent and the FTSE All-Share’s rise of 11.10 per cent.
Longer term the fund is top quartile across three and five years, data from FE Analytics shows. It generated a return of 48.35 per cent across three years, against the sector’s 44.25 per cent average and the benchmark’s increase of 38.52 per cent.
The managers acknowledge their approach is not “perfectly suited” to the environment in which they’ve been running the portfolio. Mr Barrat elaborates: “Given our differentiated approach… there are times when we think we will outperform very strongly and there are times when we will keep up with the market but we will work hard with stock selection to do so.
“I’m very pleased with the performance we’ve delivered so far. We think that if there is a moment when bond proxies are challenged and when some of these large dividend-paying names that have performed well start to come into question, or you start to see dividend cuts because they can’t afford the dividends anymore, that’s an environment where we think this fund will perform very strongly on a relative basis – and we haven’t seen that yet.”
EXPERT VIEW
Martin Bamford, chartered financial planner and managing director, Informed Choice
This is a decent UK equity income fund and its performance has steadily improved since manager Henry Dixon took over. He is an experienced fund manager with exposure to much larger portfolios in the past, so he should cope well assuming the assets under management of this fund continue to grow. He takes some bold overweight and underweight sector positions. The 3.01 per cent historic yield is unlikely to excite investors looking for income, but it reflects the typical yield of the FTSE All-Share, which is at 3.22 per cent. Because of the fund’s focus on the FTSE All-Share rather than the FTSE 100, investors should expect marginally lower risk.
