Mark Dampier: Artemis well placed to cash in as equity income comes roaring back

The stock market has been characterised by exceptional performance from small and medium-sized companies in recent years. The past two years have been particularly strong, with the FTSE Small Cap (excluding Investment Trusts) growing by over 70 per cent.

Indeed, it has been a worldwide phenomenon, with most of the best-performing global funds investing in smaller companies. Elsewhere, in the UK Equity Income sector, it has been illustrated by strong performances from the likes of Marlborough Multi-Cap Income and Unicorn Income, which each invest a significant proportion in smaller companies.

Some of the older guard seems to have been left behind. Artemis Income is one such fund. However, at Hargreaves Lansdown, we have highlighted this fund over many years and it has proven to be an excellent core holding. The lead manager, Adrian Frost, has all the experience and degree of scepticism you need from a fund manager. He is ably supported by Adrian Gosden, and as the fund has grown Nick Shenton is the most recent recruit.

Mr Frost feels the fund has been through a relatively poor period over the past year. A number of stocks, such as Tate & Lyle, William Hill, Pearson and, more lately, Legal & General, have disappointed. None of these has anything particularly in common; rather they have suffered from individual stock-specific issues. Tate & Lyle has seen reduced demand for its higher-margin products as a result of competition from China, William Hill has suffered from growing concerns over online gambling despite strong cash flows, Pearson is reinvesting its cash flows back into the business, while Legal & General has been hit by changes in pensions law.

Elsewhere, the fund has gradually been reinvesting in banks and miners. Timing, however, is notoriously difficult to get right, and the move is yet to add value. Mr Frost believes Lloyds, a current holding, could start paying a dividend in 2016-17. He views it as a relatively straightforward banking group, offering key services including mortgages and credit cards, and as such says is really a "utility" bank. It doesn't have an investment banking arm and therefore could be said to be under less political pressure.

On resources, Mr Frost believes capital expenditure is falling sharply, gradually returning to the normality of what you would expect from the sector. This means that yields look well-supported, especially as unprofitable projects are shelved. In his view, the UK contains world-class resource companies.

Mr Frost feels the world of equity income fund management has changed markedly over the past 20 years. Previously, stocks that fell sharply, with their yields rising correspondingly, were often a straightforward buy. But politics has increasingly crept into the equation. For example, there has always been an element of political risk in utilities. Now looking at energy companies such as Centrica, the pressures have led to the resignations of top management who no longer want to spend all their time defending businesses, but would rather get back simply to running them.

While I will always be a fan of investing in small and mid-cap funds, I feel we are in danger of forgetting that larger companies are valuable too. The pharmaceutical sector is a reminder of this, where recent M&A activity has proved a welcome boost. While the sector is often written off by small and mid-cap managers, it is interesting to note Mr Frost's largest holding is GlaxoSmithKline at 4.8 per cent. Also in his top 10, at 2.9 per cent, is AstraZeneca, subject of a proposed takeover by its US rival Pfizer.

Mr Frost has also utilised the fund's ability to invest up to 20 per cent overseas. Novartis is the fund's fourth-biggest holding, while performance over the second half of 2013 might have been disappointing, the stock has more recently rebounded.

The fund is one of the largest UK equity income funds at £6.5bn. However, the fund is backed by plenty of resource at Artemis. As mentioned before, newcomer Shenton has over ten years' fund management experience.

Fourteen years ago, amid the tech bubble, dividends seemed old-fashioned. Fast forward to 2014, with interest rates at an all-time low and new pensions legislation freeing up investment choices, I see equity income roaring back. In this sector, Artemis Income is still one of our favoured and most-respected choices.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.hl.co.uk

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

PROMOTED VIDEO
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SQL Developer with T-SQL, Watford, Hertfordshire - £350 - £360

    £350 - £360 per day: Ashdown Group: SQL Developer with T-SQL, Watford, Hertfor...

    Chief Financial Officer

    120-150k: Accountancy Action: We are looking for an experienced CFO from a min...

    IT Systems Business Analyst - Watford - £28k + bonus + benefits

    £24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...

    Trainee Recruitment Consultant - Birmingham - Real Staffing

    £18000 - £23000 per annum + Commission: SThree: The SThree group is a world le...

    Day In a Page

    How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

    A crime that reveals London's dark heart

    How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
    Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

    Lost in translation: Western monikers

    Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
    Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

    Handy hacks that make life easier

    New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
    KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

    KidZania: It's a small world

    The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker
    Renée Zellweger's real crime has been to age in an industry that prizes women's youth over humanity

    'Renée Zellweger's real crime was to age'

    The actress's altered appearance raised eyebrows at Elle's Women in Hollywood awards on Monday
    From Cinderella to The Jungle Book, Disney plans live-action remakes of animated classics

    Disney plans live-action remakes of animated classics

    From Cinderella to The Jungle Book, Patrick Grafton-Green wonders if they can ever recapture the old magic
    Thousands of teenagers to visit battlefields of the First World War in new Government scheme

    Pupils to visit First World War battlefields

    A new Government scheme aims to bring the the horrors of the conflict to life over the next five years
    The 10 best smartphone accessories

    Make the most of your mobile: 10 best smartphone accessories

    Try these add-ons for everything from secret charging to making sure you never lose your keys again
    Mario Balotelli substituted at half-time against Real Madrid: Was this shirt swapping the real reason?

    Liverpool v Real Madrid

    Mario Balotelli substituted at half-time. Was shirt swapping the real reason?
    West Indies tour of India: Hurricane set to sweep Windies into the shadows

    Hurricane set to sweep Windies into the shadows

    Decision to pull out of India tour leaves the WICB fighting for its existence with an off-field storm building
    Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

    A new American serial killer?

    Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
    Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

    Sting to trap paedophiles may not carry weight in UK courts

    Computer image of ‘Sweetie’ represented entrapment, experts say
    Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

    Return to Fukushima – a land they will never call home again

    Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
    Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

    Wildlife Photographer of the Year

    Intimate image of resting lions claims top prize
    Online petitions: Sign here to change the world

    Want to change the world? Just sign here

    The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?