Stephen Message has been at the helm of the £209m Old Mutual UK Equity Income fund since December 2009, clocking up several years of solid returns for investors.
He notes: “The fund aims to achieve an above-average yield with growth in income and capital appreciation over the long term through the active management of a diversified portfolio invested primarily in UK equities.
“The fund is a relatively concentrated, high-conviction portfolio, typically comprising between 40 and 60 holdings mainly selected from FTSE 350 index constituents.”
Mr Message adopts a bottom-up approach to selecting stocks and seeks holdings he believes are undervalued by the market, using metrics such as price to earnings and enterprise value to sales ratios, dividend and free cash flow yields.
“Company meetings are integral to the investment approach and form an important part of the investment decision-making process,” he adds.
While the focus is clearly on stockpicking, he acknowledges the importance of macroeconomic factors on the basis that “different companies will benefit at different points of the business cycle”. He says: “Examples would be a consideration of interest rates, inflation, employment and wage data.”
The key investor information document reveals the fund sits at the riskier end of the risk-reward scale, at level six out of a possible seven. An ongoing charge of 0.90 per cent applies to the clean fee R income share class.
Mr Message concedes there was little change to the portfolio’s sector positioning last year, with financials remaining the largest overweight, followed by telecommunications. Consumer goods is still the largest underweight in the fund.
He says: “One trend that has been evident over the past 18 months has been a gradual shift to larger companies, with FTSE 100 businesses representing over 70 per cent of the fund today, having been below 60 per cent during earlier periods under [my] tenure.”
The fund trailed the performance of the IA UK Equity Income sector in 2015, as the manager is first to admit. According to FE Analytics, in the 12 months to January 14 the fund was down 2.9 per cent, while its peer group delivered a positive average return of 1.4 per cent. The FTSE All Share was down 1.1 per cent.
Mr Message says: “The principal detractor to returns when compared to the peer group was the fund’s relative sector positioning, with above-average weightings in oil, mining and banks and below-average exposure to the consumer goods sector. Additionally, the fund’s greater exposure to large-cap businesses over mid and small-caps was a drag on returns, given the weaker performance of the FTSE 100 index.”
Over a longer time period, the fund has outperformed, with data showing in the 10 years to January 14 it generated a 77.7 per cent return to investors, compared to the sector average of 67.4 per cent and the index’s 61.5 per cent gain.
The manager points out in 2015, insurance businesses Amlin and Direct Line contributed positively, as did satellite communications group Inmarsat, ITV, Big Yellow Group, technology company Micro Focus, interdealer broker ICAP, kitchen supplier Howden Joinery and trading platform IG Group.
Weaker holdings last year included Aberdeen Asset Management, Tesco, mining businesses Rio Tinto and BHP Billiton, oil majors BP and Royal Dutch Shell and security group G4S. “Not owning a number of businesses in the consumer goods sector, notably Imperial Tobacco, Reckitt Benckiser, SAB Miller and Unilever also detracted from performance,” Mr Message adds.
He believes 2016 will be just as volatile for equity markets as 2015. “Causes for concern will likely include the impact of a slowdown in the Chinese economy on the broader global economy, the prospect of interest rate rises in the US and UK, rising political tensions in the Middle East and increasing focus on the EU referendum in the UK.”
EXPERT VIEW
Ken Rayner, investment director, Rayner Spencer Mills Research
Stephen Message has a good longer-term record, although shorter-term returns have weakened relative to the peer group. The fund is invested with a view to maintaining a risk-return structure that protects investors from extreme stock weightings and so has a wide range of holdings with a core income and core growth philosophy. The prevailing economic climate helps to provide sector ideas with the value added by tilting the portfolio towards the most attractive stocks determined by technical and financial analysis. He aims to create a differentiated performance profile by deliberately holding a portfolio that differs from the peer group. The strategy is a patient one, adding value as fundamentals are realised and value is increased.
