Fund focus: Royal London UK Equity Income
OBSR takes a closer look at Martin Cholwill’s four crown-rated portfolio, which has consistently delivered top-quartile returns in its IMA UK Equity Income sector.
Friday October 12, 2012
The aim of this fund is to achieve a combination of income and capital growth by investing in mainly UK higher yielding equities and convertible stocks.
While there is not a specific performance target, in practice the manager aims to achieve second-quartile returns within the IMA UK Equity Income peer group every calendar year with a view to delivering top-quartile returns over the long-term.
From an income perspective, the fund intends to achieve a historical yield in excess of 110 per cent of the FTSE All Share.
Martin Cholwill (pictured)
has managed the fund since March 2005. He has over 25 years of investment experience, predominantly as a UK equity portfolio manager.
Before joining Royal London Asset Management in 2005, he worked at AXA where he was in charge of various UK equity funds but he has been running equity income products since 1996 when he took over the AXA UK Equity Income portfolio.
The manager aims to achieve the fund’s objective by focusing on companies that offer increasing dividends that are backed by growing, sustainable free cash-flows.
Cholwill therefore focuses on the cash-flow of companies rather than profits, because cash-flow pays for capital expenditure and dividends, not profit.
He believes profits only matter if they convert to cash and even companies that appear to be profitable can go bust.
In addition, creative accounting has always been an issue for investors. Profits can be very misleading especially with the use of exceptional charges, revenue recognition policies and off-balance sheet vehicles.
He also believes that share prices are excessively volatile and rarely reflect the true worth of a company. In his opinion, the key measure of value is free cash-flow yield on a prudently accounted basis. The manager typically avoids bonds as he views them as a drag on capital growth.
He also incorporates macroeconomic views into his framework for picking stocks but it is stock selection that drives the overall sector exposures.
He aims for the portfolio to be broadly diversified across sectors unless there is a particular area of the market that he views as overvalued and will subsequently avoid. He is also unwilling to hold stocks that he believes are overvalued even if they contribute to yield as the fund’s total return is the key consideration.
The portfolio typically comprises 40 to 60 stocks although he has no preference with respect to market cap, thus the number of holdings can depend on the proportion of small and mid cap companies in the portfolio at any given time.
The size of a position is dependent on the manager’s view on a stock’s upside potential, timescale for the value to be realised and liquidity. Holdings in small cap stocks tend to be smaller.
Ruli Viljoen, head of investment research at OBSR, commented: "We believe the fund benefits from Cholwill’s experience and unwavering application of the process but also his pragmatism in seeking out attractively valued equity income opportunities and this approach has delivered a consistent return profile over time."
Performance of fund vs sector and index over 5-yrs
Source: FE Analytics
According to FE data, the fund is a top-quartile performer over a five-year period, with returns of 15.28 per cent. It is also a top-quartile performer over one, three and 10 years.
Royal London UK Equity Income has a minimum investment of £1,000 and a total expense ratio (TER) of 1.32 per cent.