Mr McCarron joined Fidelity, a Boston, Massachusetts-based investment house, in London in 1993. "I joined as an analyst, covering retail stocks in London, then moved to Boston for a couple of years looking at the capital goods sector." He returned to London in 1995, becoming a member of Fidelity's UK fund management team. Today, Mr McCarron is involved in the management of three of Fidelity's UK funds, principally the Fidelity Income Plus Fund, which he has run since November 1996. "The Fidelity investment approach is that we have a `bottom-up' style. We pick companies one by one. As manager of an income fund, you look at companies which pay a dividend, and you become focused on the yield a stock is paying as well as its cumulative performance. This contrasts with a pure growth fund, which may invest in companies that do not pay dividends, because they are retaining profits to grow as quickly as possible."
This has important implications for the management of the fund. "The challenge in running an equity income fund is to maintain a value approach, while ensuring you also have sufficient growth over the long term to maintain the value of the portfolio. So you are looking not just at the dividend yield, but the capacity to grow that dividend."
Mr McCarron's involvement in the management of Fidelity Income Plus coincided with a major change in the company's approach to the running of its equity income funds. "Fidelity did not have a great record for equity income investment before 1995. We had focused too much on yield and not enough on growth. We have improved by concentrating on growing the yield. The ideal stock would be one that has a higher than market-average dividend yield, so you are getting a high current dividend, which is also growing faster than the market average."
He admits this dream stock is rare but can often be characteristic of a sector. "Sectors show up positively from time to time. For example, bank stocks are looking very attractive at present. Even Lloyds TSB has a dividend which is equivalent to the market average but growing at 15 to 20 per cent per year. The stocks that provided the best performance over the past three years are those that have not only had a high yield but an accelerating rate of dividend growth.
"A good example is Kingfisher. A couple of years ago, it was growing its dividend at 7 to 8 per cent but that accelerated to 15 per cent. At the same time, the stock was growing faster than the market, as its B&Q warehouse concept was just taking off, so you got a double benefit of relatively high yield and effective re-rating of the stock, which contributed to the overall growth."
Not surprisingly, given Fidelity's overall emphasis on "bottom-up" analysis of individual companies, Mr McCarron is not too preoccupied with sector weightings. "There is a bias towards financials at present, but not a heavy one. I don't like giving too much of a sectoral bias to the fund. It is run on the basis of sector research but you can add a lot of value by making the right individual stock selection. Over the past couple of years not owning any M&S and having a lot of Kingfisher has given a major boost to the portfolio."
In fact, financial stocks account for 25.8 per cent of the Fidelity Income Plus portfolio, followed by service companies (20.5 per cent), consumer goods (19.6 per cent) and energy stocks (16.6 per cent). Since it is a relatively large fund (a little more than pounds 326m), most of its main holdings are in major blue chip names - BP Amoco (6.8 per cent), British Telecom (4.3 per cent), Glaxo Wellcome (3.5 per cent), Scottish & Southern Energy (3.5 per cent), Imperial Tobacco (3.2 per cent), HSBC (3.0 per cent) and Lloyds TSB (3.0 per cent), although the portfolio has a tendency to overweight slightly small and mid cap stocks.
Mr McCarron says: "The portfolio is all in quoted stocks, with a bit of a bias towards mid and small caps, although this is less so than in other Fidelity funds. Fidelity is known as an investor in the mid-cap area and you can certainly add value there, but there are also risks associated with investing in mid and small cap stocks and I see Income Plus as more of a middle-of-the-road fund, so I try to limit the risks. I try to have a least 60 per cent in FTSE 100 stocks, but this is still underweight relative to the market as a whole, where the FTSE accounts for nearly 80 per cent."
This risk-averse approach explains why the yield is relatively modest for an income-orientated fund. At 2.6 per cent, it is fulfilling its objective of being above the market average (around 2.3 per cent) but it does not chase an exceptionally high level of income.
Mr McCarron adds: "We are bottom-up investing from a different perspective. We take note of the index composition, but see how that breaks down into individual companies so, if necessary, we will take reasonably aggressive positions in stocks relative to their sector weightings.
"For example, using the M&S and Kingfisher example, I make sure my retail sector weighting is not far out of line with the market index, but do so by holding only one or two companies, rather than the whole sector."
Fund Manager: Tim McCarron
Fund: Fidelity Income Plus
Size of Fund: pounds 326m
Fund Launched: 1980
Manager of Fund: Since November 1996
Current Yield: 2.62%
Initial Charge: 5.25%
Annual Charge: 1.0%
Current Bid/Offer Spread: n/a (Open Ended Investment Company fund)
Minimum Investment: pounds 1,000
Minimum Monthly Savings: pounds 50
Standard & Poors' Micropal Rating (maximum KKKKK): KKKKK
Fund performance (to 9 August 1999, offer-to-bid, with net income reinvested):
One Year 4.56%
Two Years 26.27%
Three Years 79.37%
Five Years 99.81%
Seven Years 179.03%
Ten Years 129.27%Reuse content