2015 Fund Awards: UK Equity Income


Majedie UK Income

Launched in December 2011 under the care of current manager Chris Reid, Majedie UK Income has returned 93.6 per cent over the three years to 31 March. This is double that of the Investment Association's UK equity income sector and close to three times that of its benchmark - the FTSE All-Share index - over the same period.

What is more, the fund has achieved this with one of the lowest risk scores in the sector while paying a premium yield (currently 3.6 per cent), making it a stand-out contender among this year's award winners.

Reid and co-manager Yuri Khodjamirian, who came on board in October 2013, take a focused approach in the fund; currently Majedie UK Income has 60 holdings, with its top 10 positions accounting for just under 40 per cent of the total portfolio.

However, investments are spread relatively evenly across a wide range of sectors, with travel and leisure, insurance and basic materials topping the weightings, followed by media and technology and, fairly low down the list, financial services.

Commenting on the team's investment strategy, Reid says: 'We look for companies that are really trying hard to improve their strategic and operational position. This means we avoid what we call "status quo" companies, those that are just trying to hold on to their existing franchises.

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'Performance has been driven by a lot of hard work across our UK income team, generating as many investment ideas as possible and then doing as much fundamental analysis on potential investments as we can. With a truly open mind you can always learn more about a company.'

As an example, he cites one of the fund's biggest winners over the past year: alternative asset manager Man Group. Virtually written off by investors as recently as 12 months ago, Man Group has staged a remarkable turnaround thanks to an 'energetic' management team, says Reid.

As such, Man Group shares - which were trading at book value in early 2014 - have delivered growth of over 90 per cent between 30 March 2014 and 31 March 2015.

It is companies such as Man Group that lead Reid to dismiss current pessimism about the UK stock market, particularly fears of 'over-inflated valuations'. 'We don't really think about the market as a whole. We believe the UK equity market - with its breadth and diversity - will remain a good playing field on which to invest,' he says.

The 'B' share class was monitored for this award, with a three-year return of 93.6 per cent. On Interactive Investor, the 'X' share class is available with a 94.5 per cent return.


Invesco Perpetual UK Strategic Income

Launched in 1971, Invesco Perpetual UK Strategic Income has been managed by Mark Barnett - the asset manager's head of UK equities and former protégé of Neil Woodford - since 2006. Notably, the latter's departure from Invesco Perpetual in March 2014 left Barnett overseeing seven funds with assets running into the tens of billions.

Far from buckling under pressure, Barnett has maintained his strong performance record: over the past three years the Invesco Perpetual UK Strategic Income fund has returned 68 per cent, over 20 per cent more than the UK all companies sector.

Like most of Barnett's income-oriented funds, Invesco Perpetual UK Strategic Income was booted out of the UK equity income sector for not meeting its yield requirements; however, we have included it as an acknowledgement of the manager's skill and the fund's current 3 per cent annual yield.

Like his predecessor, Barnett takes a long-term approach to investing: 'I believe that patience is the most under-rated virtue of a fund manager. If you identify what you think is an interesting undervalued company that is continuing to deliver on its expectations, you should be patient in realising value, even if the short-term movements in the share price work against you.'

The portfolio is dominated by blue-chip dividend payers.

The 'No Trail Inc' share class was monitored for this award, with a three-year return of 67.9 per cent. On Interactive Investor, the fund's 'Z' share class is available and returned 69.1 per cent.


MFM Slater Income

MFM Slater Income wins our best smaller UK income growth fund award - a testament to the fund's excellent performance over the past three years to 31 March, during which time it has returned 66.7 per cent compared to an average of 46.4 per cent from the Investment Association's UK equity income sector.

This is no small feat for such a relative tiddler - currently MFM Slater Income has just £66 million of assets under management - and is a credit to the skills of its managers: Mark Slater, Barrie Newton, Bryan Quinton and Ralph Baber.

Launched in September 2011, MFM Slater Income invests across the market capitalisation spectrum, with medium-sized companies tending to feature most prominently.

According to the managers, the portfolio is made up of three types of income-yielding company: growth businesses, cyclicals and 'dividend stalwarts'. These combine to produce the fund's yield of 3.6 per cent, compared with 3.25 per cent from the FTSE All-Share index.

Slater says he expects the fund to grow at a 'reasonable rate' over the next year. 'We own a solid spread of robust, reasonably priced businesses,' he says.

'We take care to avoid low-quality businesses with high yields and we are not playing games to generate yield [i.e. using derivatives]. The portfolio yields almost 4 per cent today and we expect this to rise to around 4.3 per cent to 4.4 per cent over the next year. We believe this combination of yield and dividend growth is attractive.'

Currently MFM Slater Income's portfolio consists of 70 stocks, with its top 10 holdings accounting for just under a quarter of the total fund. Top names include asset manager City of London Investment Group, financial media publisher Centaur, and insurance and legal outsourcing firm Redde.

Slater says the latter has done particularly well for the fund over the past year, contributing 1.3 per cent to performance between 31 March 2014 and 31 March 2015.

Losers have included services provider John Menzies, which dragged the portfolio down by 0.6 per cent over the year as its aviation division disappointed. Slater is happy to admit that he 'overestimated the quality' of this part of the business, and so he has now sold the position.

The 'A' share class was monitored for this award, with a three-year return of 66.7 per cent. On Interactive Investor, the fund's 'B' and 'P' share classes are available and returned 69.1 per cent and 68.2 per cent respectively.


Montanaro Equity Income

With just £76.5 million of assets under management, Montanaro Equity Income is one of the smallest members of the UK equity income sector. The fund has delivered solid outperformance since its launch in 2006. Over the past three years to 31 March it has returned 60.6 per cent, placing it within the first quartile of the sector over the period.

Manager Charles Montanaro runs the fund with a strong bias towards 'high-quality' smaller companies which, he says, means profitable firms with easy-to-understand business models, good cash flows and annual dividend growth above 10 per cent.

The manager doesn't touch the Alternative Investment Market, which he says 'lacks the characteristics of an institutional market', and he does not use derivatives to enhance performance.

'We believe in keeping things simple; investing is all about common sense and keeping your feet on the ground. When we invest, we do so for the long term and we think in terms of decades. We are not traders, but patient investors who firmly believe in the superior compounding potential of quality businesses,' says Montanaro.

Montanaro's strong small company bias makes it unusual within the sector. However the fund has maintained a UK equity market-beating yield (currently 3.6 per cent) since inception.

It also has a unique charging structure, in that it charges no annual management fee at all. This will change once it reaches £100 million of assets under management, when it will levy just 0.25 per cent.

Montanaro Equity Income has a single share class with a three-year return of 66.7 per cent.

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