“Life is really simple, but we insist on making it complicated.”
In times like these the words of Chinese philosopher and politician Confucius should be emblazoned on every fund factsheet and investor presentation alongside "past performance is not guide to future performance".
We know markets are a challenge at the moment – there are simply too many intangibles. The stand-off between the US and China over trade wars has a new narrative every day while Brexit continues to hang over the UK like a dark cloud.
We also know volatility is on the rise and, as a result, investor sentiment has switched a number of times this year.
It is at times like these where simplicity is best – ignoring the noise and investing with a proven fund manager with a track record of managing money successfully in the long-term.
This week’s best in class is a stalwart in the UK equity income sector and has a near 20-year track record of stellar returns. The fund’s philosophy is simple - own strong, well-managed companies that can grow their earnings over time.
The £5.8bn Artemis Income has been managed by veteran manager Adrian Frost since January 2002. Mr Frost is joined on the fund by Nick Shenton and Andy Marsh, who joined in October 2012 and February 2018 respectively.
The underlying investment philosophy of the fund embraces the belief that shareholders are rewarded by investing in companies with a sustainable business franchise at an attractive valuation point in their business cycle.
The management trio do this by seeking undervalued companies that are able to generate a high degree of surplus cash. This cash can be returned to shareholders, providing an income, or re-invested back into the business.
A price target is established for each stock at the point of purchase.
This is done through numerous factors which may include underlying asset value, price to earnings ratio, dividend yield, free cash flow yield and the strength of the company's intellectual property rights.
Share prices are constantly monitored, and targets revised according to news flow.
The sell discipline is driven by the performance potential of new investments compared to existing holdings.
Typically, a stock will be sold if it reaches the price target; if from a risk/reward perspective there are better ideas elsewhere; if the company’s fundamentals deteriorate, for example because of regulatory or market change; or if the thesis does not evolve as the fund managers anticipate.
The fund is built company by company from the bottom up without reference to the index. There are no restrictions on sector weightings, and this has been an important driver of outperformance in the past.
The fund managers’ focus on absolute risk ensures the portfolio is properly diversified.
The team value high quality management and have met the management of their existing holdings on several occasions. The fund is designed as an all-weather vehicle focusing on consistency rather than ‘shoot the lights out’ performance.
The result is a portfolio of 50-70 stocks with a maximum limit of 5 per cent on any individual holding.
It also has a large-cap bias, while up to 20 per cent of the fund can also be invested overseas – increasing the number of opportunities available. There are some familiar number in the top 10 holdings including BP (5.2 per cent), Royal Dutch Shell (4.3 per cent) and GlaxoSmithKline (4.1 per cent).
It is a proven process which has seen the fund become one of the most highly regarded in the UK Equity Income sector.
It is very rare to see a fund in such a competitive sector which is first quartile over one, three and five years, more importantly its long-term figures deliver with the fund returning 308.26 per cent since Adrian took over, compared to 192.76 per cent for the Investment Association UK Equity Income sector. The fund also has an historic yield of 4.4 per cent.
This fund stands out in a truly competitive sector with a solid management team, process and track record which have consistently delivered. It has been one of our favourite income funds for a number of years and should be a consideration for all investors looking for exposure to UK income stocks.
Darius McDermott is managing director of FundCalibre
