Strong inflows in the last six months have pushed assets under management (AUM) to £2.2bn – £1.2bn more than its £1bn guideline. This figure was published at the beginning of October, and so doesn’t take into account any inflows from Invesco Perpetual Income or High Income, following star manager Neil Woodford’s announcement he will leave the funds.
Clive Beagles (pictured) and James Lowen’s four crown-rated vehicle has long been recommended by experts as a diversification play for investors, as it offers something very different to core options such as Artemis Income and the Invesco funds. The managers have a mid cap bias, which means that the fund gets its yield from a different area of the market than its mega cap focused rivals.
The mid cap focus has also allowed Beagles and Lowen to deliver strong capital growth since its launch back in 2004, which has contributed to its stellar total return record.
However, Ben Willis, head of research at Whitechurch, says he is becoming concerned by the size of the fund, and will not buy any more of it as a result.
"We hold a position in one of our legacy strategies and I must say I’m still impressed by their process and how they do things a bit differently to everyone else," he explained. "Lowen was an excellent addition to the team."
"Our biggest concern is the size of it. Initially they soft-closed it at £750m, only for it to re-open again – what has suddenly changed for it to be able to run more than twice as much as that? We asked them this question and they said they have no problems with liquidity, but it has to be a concern."
"At the moment, not too many people are going to ask questions because it has done so well, but there will come a point when flexibility and therefore performance is jeopardised."
JOHCM UK Equity Income’s prospectus clearly outlines £1bn as the point at which capacity needs to be addressed. The firm says it has a duty to soft-close its funds to protect existing investors, believing that it takes this issue much more seriously than its rivals.
"The maximum capacity level for the strategy is approximately £1bn," the prospectus states. "This allows [the managers] to protect performance for the existing client base and ensure that they do not encounter liquidity constraints."
"Assets under management are capped at levels far below those of most major competitors to allow flexibility in terms of buying smaller cap stocks, flexing position sizes and exiting stocks."
Even though the fund’s assets are now more than twice as high as the stated capacity limit, JOHCM confirmed that it has no immediate plans to close the fund to new investors.
A spokesperson for the group says that the managers have more than enough flexibility to keep up their strong performance and maintain their mid cap bias.
"The fund still has a very large allocation to mid caps and is still adding value through them," the spokesperson said.
"In terms of the fund size, we’ve put a 5 per cent initial charge in place for all new direct investors, but platforms are unaffected."
"We’re not actively marketing it, but it’s performed very well and so gets attention."
"[The fund size] is certainly something we’re keeping a close eye on – let’s just see how it unfolds. What’s clear to us is that the fund’s performance hasn’t been jeopardised."
Performance of fund, sector and index since launch
Source: FE Analytics
"I think I’m right in saying that the fund is the second-best performer in the equity income sector since launch, and it’s had an excellent year," the spokesperson added.
Our data shows that JOHCM UK Equity Income has returned 27.14 per cent so far this year, putting it in the top-quartile of its sector. By point of reference, the UK Equity Income sector average is up 22.6 per cent, while the FTSE All Share is up 19.57 per cent.
Performance of fund, sector and index in 2013
Source: FE Analytics
The fund is also one of the highest yielders in the sector at the moment, at 4.6 per cent.
Willis says that one of the big selling points of JOHCM UK Equity Income in the early days was that its top-10 was so different to a lot of its rivals.
JOHCM doesn’t officially disclose how much mid cap exposure it has on its factsheet, though its top-10 is hardly littered with FTSE 250 stocks.
Property investment and development company Segro is Beagles and Lowen’s only mid cap stock in the top-10. Major holdings include Shell, Vodafone, GlaxoSmithKline and BP – all staples with core equity income funds.
However, FE analyst Amandine Thierree says that in recent years the fund has typically held mid cap stocks further down in the portfolio, preferring to have the chunkiest positions in more established large cap companies.
Among the managers’ biggest active bets at present are FTSE 250 companies DS Smith and 3i.
"I suppose the top-10 could have a lot in large caps because that’s where they see the biggest opportunities, but at the end of the day one way to counteract problems with liquidity is to hold more in large caps," said Willis.
Top-10 holdings of funds
| Name |
|---|
| HSBC HLDGS |
| ROYAL DUTCH SHELL |
| BP |
| VODAFONE GROUP |
| GLAXOSMITHKLINE |
| GLENCORE |
| TESCO |
| SEGRO PLC |
| STANDARD LIFE PLC |
| ITV |
Source: FE Analytics
"The fact is it has gone so far that capacity is a bit of a worry, and that doesn’t even include any extra money coming from the 'Woodford effect'. Whether they want the new money or not, investors are going to look at the best-performing UK Equity Income funds as an alternative, and JOHCM fits that bill."
"We wouldn’t allocate any new money to it," he added.
Mark Dampier, head of research at Hargreaves Lansdown, says it is too soon to accuse JOHCM of dropping its mid cap exposure, but he does think the issue of size is one that needs to be addressed.
"Given that mid caps have done so well, it could be that the managers are taking profits in this area," he said. "I don’t think the top-10 is evidence – to be honest, I don’t know where we are with the fund at the moment."
"From my perspective, I want good funds to stay open, but there does come a point when enough is enough. The reason I’ve always liked it is because it does something different and does it very well, so you’ve got to be a little concerned."
"It’s something I’ve spoken to Clive Beagles about and he seems OK with it. That said, I don’t think he wants the fund to get that much bigger. I think we could be on the brink [of a firmer soft-closure]."
Brian Dennehy, managing director of Dennehy & Weller, is more relaxed about the size of the fund for the time being, pointing out that JOHCM continues to have a larger mid cap exposure than its peer group.
Although Beagles and Lowen don’t hold many FTSE 250 stocks at the top of the portfolio, he adds that their top-10 is still very different from a core equity income fund such as Artemis Income.
FE data shows that only six of the 98 funds in the UK Equity Income sector hold ITV in their top-10. Moreover, Beagles and Lowen are the only managers of their kind to hold Standard Life in their top-10.
JOHCM UK Equity Income requires a minimum investment of £1,000 and has ongoing charges of 1.28 per cent. This does not include a 15 per cent performance fee on everything returned in excess of the FTSE All Share, though.
This is the second time in the space of a week that Willis has expressed concern at fund groups going above and beyond their capacity limits. He highlighted Unicorn UK Income as a possible offender in a recent article.
In an article later today, FE Trustnet will be looking at some alternatives to the JOHCM fund that have retained a mid cap focus.
