Was 2020 the nadir for UK equities?
It certainly seems so, as the ongoing uncertainty over Brexit; the underwhelming response to the initial threat of Covid; and the unprecedented dividend cuts made the market look as unattractive as it has ever been in my 25 years in financial services.
At one point, these factors dragged valuations to 50-year lows versus the MSCI World Index average*. Despite the market sell-off in the first quarter of last year, global equities recovered to return more than 12 per cent for the year by the time the curtain came down on 2020. By contrast, the FTSE 100 fell by almost 12 per cent**.
This year could not be any more different. Brexit has been largely addressed, while the UK has been the envy of the world for its vaccine rollout. The rapid rebound in value investing is also good news for the UK, which has an overweight to cyclical industries which fall under this investment style.
Corporate and M&A activity is also on the rise. We’ve already seen some £25bn worth of PE acquisitions of UK-listed companies in the first five months of 2021***.
At this point there are numerous opportunities for investors - value, small-caps and the ability to take advantage of the dividend recovery to name a few – but with hundreds of UK funds to choose from, finding one with the flexibility to do all of the above is not so simple. However, this week’s best in class does just that.
The GAM UK Equity Income fund is managed by industry veteran Adrian Gosden and Chris Morrison. Adrian is known for his time at Artemis, where he successfully managed the Income and High Income funds with Adrian Frost, before launching this fund in October 2017. The fund is multi-cap in nature, with almost half of the portfolio sitting in both mid and small-cap companies****. This flexibility is supported by the fact Adrian is not afraid to adjust the portfolio around rapidly if better opportunities appear.
The process for selecting and valuing companies is based on how much spare cash each business generates and their ability to pay dividends with this cash. The investment process sees the managers filter for companies with good cash-flow metrics as well as an assessment of the industry a company operates in. Meetings with shareholders and management are also essential with the team carrying out around 200 meetings a year.
Adrian can and will take full advantage of his 20 per cent 'non-standard' holdings allowance, meaning he could at various stages hold some European companies and potentially bonds if they offer a better return profile than a company's shares – giving him additional flexibility.
The final stage is labelled ‘timing’, with the managers insistent that they will be patient, making sure they pay the right price for the right stocks.
The portfolio will consist of around 50-60 stocks with only minimal levels of cash due to the income requirement. The overall portfolio has a tilt towards the value end of the market.
The fund has returned 15.2 per cent since launch^ (compared with 11.8 per cent^ for the sector average) and has been the fifth best performers in the IA UK Equity Income sector year to date, returning 22.4 per cent^^ (vs 14.7 per cent for the average peer). Ongoing charges stand at 0.62 per cent with the fund offering an historic yield of 3.2 per cent****.