The UK equity income sector has struggled to shine over the past year or so despite a strong British stock market. The sector suffered during the banking crisis when a historically lucrative source of dividends dried up. The subsequent economic recession then resulted in more companies cutting dividends.
So with the benefit of hindsight, February 2007 was perhaps not the best date for Standard Life to launch its UK Equity Income Unconstrained Fund. After a reasonably good start, the fund struggled during the financial crisis and was among the poorest performing in the sector. On 1 January 2009 Thomas Moore took over its management. He was not, and still isn't (arguably unjustifiably), a well-known manger and turning round a poor-performing fund from a major group such as Standard Life was a challenge. Yet he has risen to the occasion. Under him, the fund has recovered some of its losses, though it remains about 15 per cent below the initial offer price.
Mr Moore, who receives praise in today's 'Your Money' investment feature on page 44, was quick to realise that while many stocks in the portfolio were unsuitable for the financial crisis, they had the potential to perform well in the recovery he believed was on the way. It was a brave decision to remain weighted in many stocks that had underperformed during the crash, but what a shrewd decision it turned out to be. During his tenure, the fund has grown 80.5 per cent, compared with a sector average of 42 per cent.
Given the fund's previous performance, it is hardly surprising to see it is only about £24m in size. However, this could be a tremendous advantage. Many better-known funds in the sector are extremely large. It is almost a necessity for them to have significant holdings in the top 20 dividend-paying companies (that account for three-quarters of total UK dividends paid).
There is nothing wrong with this. Mr Moore's largest holding is HSBC, a share that both he and Standard Life have much confidence in. Indeed, it could be argued that targeting larger companies should work better in 2011. It certainly hasn't worked well for the past couple of years, though, as small and medium-sized companies stole the limelight.
Mr Moore has fewer liquidity constraints with his smaller, more nimble, fund and has been able to capitalise on this trend. The fund has 41.5 per cent in FTSE 100 companies, 40 per cent in mid-caps and approximately 14 per cent in smaller companies. This means he can search the entire UK stock market for companies with the strongest dividend growth potential.
Going forward, Mr Moore is keen to stabilise the fund's income, which saw a 49.5 per cent increase in 2008, followed by a decline of 24.5 per cent in 2009 and a rise of 7.5 per cent in 2010. The fund is currently on a forward yield of 3.5 per cent; probably about 1 per cent below many other UK income funds. However, should Mr Moore identify the right stocks, I think the fund has tremendous potential to show strong dividend growth over the coming years.
I have met Mr Moore three times and am always impressed with his enthusiasm, keenness and plain hard work. It could be said that Standard Life is taking a risk with a relatively inexperienced fund manager but, given its robust team process, I'm not overly concerned. While the fund isn't on Hargreaves Lansdown's list of most favoured funds at present, we are certainly monitoring it closely. It will be interesting to see how it copes if the bigger blue chips begin to perform better. This will be a challenge for Mr Moore, who is clearly underweight in this area.
I have high hopes for Mr Moore and the fund. We are need new blood in a sector that is not only vital for many people, but which will become increasingly important as the baby boomers start to retire and look not just for capital growth, but a rising income, too.
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.h-l.co.uk/independentReuse content