This £1.1bn fund from Standard Life Investments (SLI) was launched in February 2007 and has been managed by Thomas Moore since January 2009.
It has appeared in the Investment Adviser 100 Club in both 2014 and 2015. The manager explains that the vehicle has a dual focus on income and capital growth. “We believe that by taking that total return holistic approach to managing a UK equity income portfolio, we’re going to maximise total returns. That’s the philosophy, to look at the total return in aggregate rather than just focusing purely on income.”
Mr Moore notes that the benefits of using an unconstrained approach in achieving these aims means not automatically picking the highest-yielding traditional UK equity income stocks, such as the big oil and pharmaceutical companies.
“It means we can go anywhere in the UK market to identify our best ideas and put those to work in the portfolio,” he says. “As it is being driven by our highest conviction ideas, over time that has delivered decent total returns.” This is demonstrated by the fact the fund has appeared in the top quartile of the Investment Association (IA) UK Equity Income sector in six out of the seven years he has been in charge.
Aside from making sure the fund is geared and positioned towards the highest conviction ideas, it also uses a ‘focus on change’ investment process used at SLI. This approach attempts to identify stocks where there is a change in the company fundamentals that hasn’t yet been priced in by the market. “That way we can be quite agnostic between growth stocks or value stocks and we can be much more open-minded about what kind of stocks we hold at any point in the cycle,” the manager notes.
While the process hasn’t changed, the team has been embedding some risk-management tools that have been developed at SLI for its equity funds. “[These] allow me to identify the incremental volatility or tracking error that we are adding to the portfolio if we increase our weightings in individual stocks or introduce a new stock,” Mr Moore explains.
“The benefits of that risk management have shown themselves in 2014 and 2015, as they were both down years for the FTSE 100 [index, while being] strong years for the portfolio.”
Although macroeconomic factors are not a primary driver of the portfolio construction, last year there were some big macro themes such as China that drove stock and sector performance. As a result, the vehicle was zero weighted to oil majors throughout 2015, as well as reducing exposure to industrials. “The watchword at the moment is caution. The macro remains tough globally,” he adds.
For the five years to January 14 2016 the fund’s Platform One accumulation share class has delivered 76 per cent, compared with the IA UK Equity Income sector average return of 43.1 per cent, data from FE Analytics shows. The risk-reward level is at five out of seven, while the ongoing charge for the share class is 1.15 per cent.
The portfolio has a relatively low turnover, with an average holding period of three years. When the team believes some of the best ideas have played out, it either reduces or sells out of the position, which is usually when valuations have become more stretched or “where we can no longer say we have some kind of angle against the rest of the market”. This occurred in the second half of 2015 in some UK names, with the fund reducing positions in stocks such as Travis Perkins.
Mr Moore notes: “On the positive side we were able to build some holdings in names we liked that had been a little bit soft. We added to our biggest position, BT, when it pulled back in the summer. Generally, it’s just been tweaks to the portfolio rather than wholesale changes.”
Aside from avoiding key macro risks, the manager also highlights the importance of having “avoided all dividend cuts in 2015”. Instead, the big winners for the fund have included temporary recruitment consultant Staffline, SuperGroup and Rightmove.
He notes: “With unconstrained investing we’re not going to look at the yield as the be all and end all. We’re going to look at the potential for that dividend to grow, and in both SuperGroup and Rightmove’s case they are rapidly expanding firms.”
EXPERT VIEW
Ken Rayner, investment director, Rayner Spencer Mills Research
Thomas Moore was highlighted by us as a manager to watch in the future at our 2014 awards ceremony, so we are pleased he continues to produce consistent results. This fund is looking to isolate the team’s best ideas and run larger position sizes where there is higher conviction, although position sizes are not related to index weight. The vehicle looks at the prospects for total return in a stock, not just income, and therefore the manager only wants to hold companies with capital growth potential. The fund is not managed against either an index or a benchmark, and as a result Mr Moore does not follow consensus.
