Mark Dampier: Let the growth be unconstrained

The Analyst

This week I continue with my theme of constructing an income portfolio using UK equity income funds and, in particular, the importance of using a number of different management styles rather than choosing the funds with the highest yields. One investment house that illustrates this, and which has really come to the fore over the last few years, is Standard Life Investments. They have a number of top performing UK funds including a Recovery fund, which I mentioned in this column in March last year, and a traditional equity income fund run by Karen Robertson.

A couple of years ago the team launched another equity income fund, the UK Equity Income Unconstrained Fund. The fund was intended to dovetail with Karen Robertson's fund, having a slightly lower income target but a wider approach. Unfortunately the fund got off to what can only be described as a shaky start. After a couple of months it was hit by heavy UK stock market falls, and the manager at the time exacerbated the problem by averaging down on certain stocks which ought to have been sold outright.

A change of fund manager to Thomas Moore a little over a year ago seems to have transformed the fund's performance. To be fair (and he would be the first to admit this) the sudden change in market sentiment meant that many of the stocks in the fund suddenly made a comeback just after he took the reins. However, he did make some key decisions; axing positions he felt would continue to be poor and adding to his favoured cyclical stocks in the earlier part of 2009. This has left the fund as one of the top performers in the UK Equity Income and Growth sector over the last year.

The fund's yield is much lower than many UK equity income funds at 3.7 per cent, though this is still higher than the market average of 3.3 per cent. However, when you compare funds it isn't necessarily right just to choose the one with the biggest yield. Having slightly less of an income constraint allows a larger universe of stocks and means the fund can pick slightly lower yielding shares that have greater prospects of growing their dividends.

Standard Life's investment process starts with a computer screening of the whole market. This takes account of different factors including dividend yield, growth in earnings, share price momentum and many others. It is in fact an excellent screening process, though admittedly it works less well around inflection points in the market when things suddenly change. Combined with this is the use of a "winners list" of stocks, 20 of the Standard Life research team's highest conviction ideas from outside the FTSE 100. The combination of these two processes works very well and allows a team approach but gives the individual fund managers freedom to pick further stocks.

Much of the success of the fund has been down to the fact that Standard Life did not (as many did) give up on more economically sensitive stocks in the first quarter of 2009. Stocks such as Fenner, a manufacturer of conveyor belts for mining and industrial applications, were heavily sold off in 2008 on fears of cuts in expenditure in the mining industry. The perception of the market was wrong and, even after doubling in price, the shares still yield 3.4 per cent.

To balance these higher risk opportunities the fund also holds solid defensive businesses such as Halfords, the automotive retailer. This is one of the companies that has profited from the recent prolonged cold temperatures as sales of de-icers and other cold-weather paraphernalia have taken off.

Another reason to like this fund is that it is relatively small at only £20m, which gives it greater flexibility compared to some of the huge funds in the UK equity sector that run into billions. The fund is not yet on our list of favoured stocks as we have only recently met the new fund manager. However, if Thomas Moore and Standard Life investments can continue this fund's performance then it's clearly going to attract a lot of buyers. I am certainly putting it as down as one to watch for the near future, as it offers something different to many of the mainstream equity income funds.

Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independent

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

News
people
News
John Rees-Evans is standing for Ukip in Cardiff South and Penarth
news
Arts and Entertainment
Bianca Miller and Katie Bulmer-Cooke are scrutinised by Lord Sugar's aide Nick Hewer on The Apprentice final
tvBut Bianca Miller has taken on board his comments over pricing
Life and Style
Approaching sale shopping in a smart way means that you’ll get the most out of your money
life + styleSales shopping tips and tricks from the experts
PROMOTED VIDEO
News
Elton John and David Furnish exchange marriage vows
peopleSinger posts pictures of nuptials throughout the day
News
in picturesWounded and mangy husky puppy rescued from dump
Sport
David Silva, Andy Carroll, Arsene Wenger and Radamel Falcao
football
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

    SThree: Trainee Recruitment Consultant - LONDON

    £20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

    SThree: Graduate Recruitment Consultant

    £20000 - £25000 per annum + OTE £35000: SThree: SThree are a global FTSE 250 b...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £35K - £45K: SThree: SThree Group have been we...

    Day In a Page

    Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

    Clocks, rifles, swords, frogmen’s uniforms

    Surrounded by high-rise flats is a little house filled with Lebanon’s history
    Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

    Four months after the bombardment, Gaza’s wounds are yet to heal

    Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
    Gastric surgery: Is it really the answer to the UK's obesity epidemic?

    Is gastric surgery really the answer to the UK's obesity epidemic?

    Critics argue that it’s crazy to operate on healthy people just to stop them eating
    Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

    Homeless Veterans appeal: Christmas charity auction

    Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
    Pantomime rings the changes to welcome autistic theatre-goers

    Autism-friendly theatre

    Pantomime leads the pack in quest to welcome all
    The week Hollywood got scared and had to grow up a bit

    The week Hollywood got scared and had to grow up a bit

    Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

    Panto dames: before and after

    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
    Thirties murder mystery novel is surprise runaway Christmas hit

    Thirties murder mystery novel is surprise runaway Christmas hit

    Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
    Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

    Anne-Marie Huby: 'Charities deserve the best'

    Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
    The botanist who hunts for giant trees at Kew Gardens

    The man who hunts giants

    A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
    The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

    The 12 ways of Christmas

    We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
    Birdwatching men have a lot in common with their feathered friends, new study shows

    The male exhibits strange behaviour

    A new study shows that birdwatching men have a lot in common with their feathered friends...
    Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

    Famous diaries: Christmas week in history

    Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
    From noble to narky, the fall of the open letter

    From noble to narky, the fall of the open letter

    The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
    A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

    A Christmas ghost story by Alison Moore

    The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'