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