While it was only launched in January 2011, the Irish-domiciled fund has already garnered £220m worth assets under management with a large proportion of those flows coming from multi-managers who have been drawn to its unique approach and impressive track record.
According to FE Analytics, there are now nine funds within IMA universe that count it as a top 10 holding, with many other managers holding it lower down portfolios.
Some of Lang and Pattisson’s biggest backers include Robin McDonald and FE Alpha Manager Marcus Brookes Schroder MM UK Growth fund and the GAM fund of fund range, which is run by Charles Hepworth.
Rob Burdett also counts it as a top 10 holding in his F&C MM Navigator Distribution fund as he describes Ardevora UK Income as a future star of the IMA UK Equity Income sector.
“It’s obviously a very competitive sector but we felt it was a new breed of fund that is a potential heir apparent to the “old faithfuls” within the sector which have become bigger and bigger portfolios,” Burdett explained.
“We had been monitoring Ardevora UK Income, and others like it, for a while now but we chose the Ardevora fund because it is run by very experienced managers and we had a very successful time with them when they were at Liontrust.” Our data shows that since Lang and Pattisson’s fund was launched in January 2011, it has been the eighth best performing portfolio in the IMA UK Equity Income sector with returns of 54.75 per cent.
Performance of fund vs sector since Jan 2011
Source: FE Analytics
The fund delivered top quartile returns in 2012 and 2013 and is also a top quartile performer over the last 12 months.
However, the portfolio, which is made up of just 35 holdings, is managed in a very different way to the majority of its peers as the managers concentrate on market psychology more than anything else.
For instance, instead of judging whether a stock is cheap relative to its “mythical intrinsic value”, as Lang terms it, the managers build their portfolio around stocks where there believe the market consensus is wrong.
Because of this, Lang says that this means the way in which he and Pattisson locate income opportunities is unlike many of their competitors.
“The main way in which our fund is different to others in the sector is that we don’t pick stocks because of their dividend yields,” Lang explained.
“Most income managers will fill their portfolio with companies that pay an above average income to make sure they meet the sector’s yield requirement. We don’t do that, we average about 35 stocks and only once we have selected do we look at the dividend yield.”
“We will then add more to the highest yielding stocks and less to the lower yielding stocks to make sure we are delivering a good amount of income to our investors.”
Clearly, a number of investors would view this strategy as overtly risky as it means that there is a chance that the portfolio is made up purely by very low yielding stocks. However, while Lang understands that concern, he says it is a very unlikely situation.
“In theory, it is possible, but if you were to look how the average index yield is made, it is made up of none-dividend payers, low yielding and high yielding stocks. Our portfolio has very similar distribution characteristics,” Lang said.
“Also, a high proportion of the stocks we invest in are the ones which pay a special dividend because they tend to be the type of companies where the managers are acting in an unusually share-holder friendly way and they are giving back cash to share-holders instead of just blowing it.”
“That does help our income generation as well.”
However, as a recent FE Trustnet article highlighted, Land and Pattisson’s strategy has enabled them to pay out an above average level of income.
Our data shows that the fund currently yields 3.55 per cent and investors who bought £1,000 worth of units in the fund three years ago would have earned £120 worth of income since.
Income earned on £1,000
Source: FE Analytics
The make-up of the portfolio is also very different to others in the sector.
For instance, Lang and Pattisson hold nothing in some of the most popular FTSE 100 listed banks, insurers, oil and gas and pharmaceutical stocks.
Instead, the portfolio is more geared towards mid-caps with FTSE 250 companies such as Berendsen, Inmarsat and Persimmon featuring in the top 10 holdings list. The fund has ongoing charges of 0.94 per cent.
Lang says that his and Pattisson’s investment approach at Ardevora is different to the one they had on their Liontrust Global Income fund.
For instance, at Liontrust the duo would primarily invest in small-caps, while at Ardevora they won’t invest in any company that has a market cap of less than £250m. They also have a higher turnover rate and won’t just invest in companies because they pay a dividend.
Lang also says the way in which they assess stocks is now different.
“At Liontrust we did not spend a lot of time studying the way companies were run, especially with respect to risk ,our main emphasis was on looking for especially “cheap” stocks,” the manager explained.
“At Ardevora, we start by spending a lot of time considering how risky a business is. This means we reject a lot of stocks that would probably have appeared in a fund run along the lines of the old Liontrust approach.”
