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Montanaro UK income fund surges in popularly as DFMs flock

A dive into the Asset Allocator database has thrown up an interesting tit-bit, with a surge in new buyers of the Montanaro UK Income fund over the past year.

The mid-and-small cap specialist fund is now among the top five most widely owned mandates in the ultra-competitive UK equity income universe after attracting a net of three new DFM buyers in 2022.

This small fund - only £75mn in size - is now held by a total of five of the allocators we cover - tied with Franklin UK Income and Troy Trojan Income.

Although the fund has income in its name and its objective, it is listed within the UK All Companies sector, and has underperformed that sector over the past one and three years, and broadly matched the sector return over five years. It hasn't done much better against the UK Equity Income sector, for what it's worth.

The fund, which yields 3.2 per cent, has also attracted one buyer in our income database, where it is now held by four portfolio ranges and is now tied with Evenlode Income in the top five of most popular UK equity income funds.

Given that none of the allocators in our database own a material position in a UK small cap fund, and that the proportion of balanced portfolios' capital deployed into dedicated UK small cap funds has dwindled away over 2022, it is safe to say that it's not a sudden surge in desire to own UK smallers that has prompted the scurry of capital into the Montanaro fund.

One of those who allocates to it, Darius McDermott, the adviser on the Chelsea Multi-manager fund range, told us the fact Montanaro specialises in smaller companies investing, and so has a large team dedicated to this, is one of the reasons he owns it. 

The UK Smaller Companies sector had a net outflow of £47mn in December. 

Apart from the Montanaro fund, the most popular UK smaller companies funds among the allocators we cover are a pair run by boutique managers, with the Tellworth UK Smaller Companies fund, which is run by a duo of managers who previously worked at Schroders, and the Chelverton UK Growth fund.

Both are owned by three of the allocators we cover.

Asset Allocator suspects the fact the Montanaro fund is rated an article eight for SFDR purposes might be one of its attractions. This is the second highest tier of sustainability available under the SFDR criteria. 

To have a fund which is established as long as the Montanaro vehicle and also ticks the sustainability box may have appeal to allocators. The company in its marketing says "at least" 90 per cent of the fund's assets meet sustainable criteria at all times. 

The largest sector exposures are to telecoms and industrials.

Indeed we checked our ESG database and Montanaro UK Income is one of only six UK equity income funds which are used in ESG portfolios. The others - in order of popularity - are Janus Henderson Responsible UK Income, CT Responsible UK Income, Trojan Ethical Income, Evenlode Income and Unicorn UK Ethical Income.

By way of contrast, our non-ESG database contains 29 UK equity income funds.

This obviously suggests DFMs have a bit of a struggle on their hands when it comes to finding ESG-friendly sources of UK equity income.

Of course being small cap and sustainable are not mutually exclusive, and one wonders if the new SFDR regime will attract more allocators towards funds which wear their sustainability lightly (ie don't include it in the name of the fund).

What this might mean for client demand for funds which do use words such as 'sustainable' in their branding is anyone's guess. 

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