Mark Dampier: Follow the fund manager who invests flexibly across the market
Saturday 16 August 2014
When constructing an income portfolio using UK equity income funds, I believe it's important to select a variety of management styles rather than choosing the funds with the highest yields.
The Standard Life UK Equity Income Unconstrained fund employs a similar approach; it doesn't target a specific level of income, while it invests flexibly across the entire UK market.
A change of manager to Thomas Moore in 2009 seems to have transformed the fund's performance. It is now often near the top of the tables.
Passive fans may put this down to luck, as Mr Moore's tenure began not long before the market rebounded following the financial crisis. While true, I would point out he was brave enough to keep many of the fund's original stocks, believing their share prices had been beaten down too far and were due a re-rating.
Indeed, the UK team at Standard Life stood out from the crowd at this time: their bullish stance developed well in advance of many other fund management groups. It took a strong stomach to hold on to some of the UK's worst-performing stocks, but Mr Moore did so and his views were subsequently vindicated.
Others may suggest the fund's bias towards small and medium-sized companies has been the main performance driver, given their strength over the past five years. This is true to an extent, but I feel credit is also due for the manager's stock-picking. The UK team seeks companies experiencing positive, and as yet unrecognised, change – which will ultimately cause others to buy the stock and drive the price upwards.
Mr Moore doesn't like to be labelled a mere "mid-cap" manager. The unconstrained nature of his fund allows him to invest wherever he sees value and share price momentum. This approach means greater volatility should be expected; the fund has previously undergone short-term, but severe, periods of underperformance, especially when the market has been in "risk-off" mode. More recently he has increased exposure to larger companies in the FTSE 100, such as Rio Tinto, where he envisages strong dividend growth over the next few years. BP is another example. The company has been selling its less profitable assets, reinvesting in those of better quality. It's currently paying an attractive yield of around 5 per cent, although with ongoing political challenges, the company is suffering due to its holding in Russian oil company Rosneft.
In the past, Mr Moore has been critical of many FTSE 100 stocks, in particular pharmaceuticals such as GlaxoSmithKline, where he sees earnings falling and little in the research pipeline. On the other hand, he has been a holder of telecoms group BT for quite some time, where he believes the very opposite characteristics can be found.
He admits to missing out on the rally in AstraZeneca's share price this year, though unlike many other fund managers, he doesn't see much value here. Mr Moore points out that earnings growth across the FTSE 250 looks far better.
Overall, I would say the fund is quite the diversifier. Unlike many of his larger competitors such as Artemis, Woodford IM and Invesco Perpetual, Mr Moore holds no Royal Dutch Shell or Imperial Tobacco, and as mentioned above, no GSK or AstraZeneca. Among his largest holdings are Legal & General and British American Tobacco, with less mainstream businesses such as Britvic, Beazley and Direct Line. This manager is certainly no benchmark hugger.
Interestingly, for those seeking income, and income growth, the fund has seen average dividend growth of 23 per cent over the past year. Given that once interest rates rise, they are likely to do so gradually and peak at a relatively low level, this is surely the type of fund investors should be pursuing, especially for tax-free wrappers such as Isas and Sipps. In my eyes, a portfolio of companies demonstrating both strong dividend and capital growth is an ideal combination.
Mr Moore also runs an equity income investment trust.
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
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