Why invest in equities for income?
“We kind of don’t view the job of building an income fund, if you like, as finding particular areas of the market which are great at generating income. What we prefer to do is treat the market as a source of raw materials where we can get a combination of income and income growth. I think that’s one of the big positives that you get if you go looking for income in the stock market generally.”
“As you pointed out, there’s a kind of waxing and waning of interest in the stock market for income depending on where else you can get your income. But most of those other places that you can get income, it’s all fixed. You buy a bond or you put your money in a bank account and you kind of know exactly what you’re going to get. So you know you’re definitely going to get your money back.”
“What you get when you go into the stock market is that you get the potential for that income stream to grow, but it comes at a price, if you like, which is the unpredictability. Also, you get this nice property which, for a lot of people who are long-term savers is really important, which is you get a kind of protection policy against inflation. Because ultimately that’s why you save, so you can then spend it on things later in life. If you save and then you find that all the things that you want to buy have gone up a lot and your savings and your income-generating power hasn’t gone up as fast, then what’s the point of saving?”
How do you deliver an income in the Ardevora UK Income fund?
“It’s just more about getting a reasonable balance of all the constituents that you’re building your income-generating portfolio out of, which is those underlying stocks. And making sure that you’re getting that nice combination of a bit of income, a bit of growth, without too much risk.”
“You view it – I suppose this is where we’re slightly different to other people – you view it almost like building a car. You need lots of little different components to make the whole thing work but that doesn’t necessarily mean you need lots of things that all look like a car to make it work, if that kind of makes sense.”
“It’s the same with income investing. A lot of people think income investing is about just buying stocks with lots of income. But actually I don’t think it’s about that. I think it’s about building a portfolio of a combination of different types of stocks which as a package give you what you want, which is a reasonable level of income, reasonable level of risk and the prospect of growth as well.”
What sets Ardevora UK Income apart from other UK equity income funds?
“Having run income funds for a long time, certainly that the way you’re taught to do it is to go 'well, you’re looking for income', you look at all the stocks out there and you only look at the ones which have got above average income and then you build your portfolio out of that.”
“For us, income comes kind of right at the end. We go, 'well let’s look at all of the stocks that are out there, let’s try and work out the ones we think that are interesting and have got a nice mix of risk and reward'. Most of them haven’t. You look at what you’ve got left and then you go, 'OK, now how do I build a portfolio out of that which then generates the income that I want?' Some of those might not have any dividends at all, some of them might have a lot, and you just combine them in a way so that the overall average yield you’re getting from that collection of stocks kind of looks good.”
“So right at the beginning, if you like, everybody else kind of heads right and we head left.”
What areas of the market are the best "buy-and-hold" bets?
“My view is that everything changes. It’s one of the beauties of being a stock market investor. You can buy and sell things when you want. It’s a liquid market. It’s not like buying property. It’s not like private equity. It’s not even like buying a bond because a bond has no risk – only if you buy it and hold it right until the end. In stock markets you can move around. So that means you can react to changing circumstances and our view is that things are changing all the time.”
“So there’s no such thing really as an individually safe market or an individually safe business or stock because stuff is changing all the time. But what you can find is the totality of all the things out there – the world stock markets – that as an entity is quite robust. It’s this seething mass underneath, if you like, which you can move around in. Our view is you want to react to how things are changing, to be constantly trying to push yourself into the opportunities that look relatively low risk but where the rewards look above average. You’ve just got to keep playing that game over and over and over again.”
“One of the traps people can fall into is that they find a market or a business which has done very well for them and has made them feel comfortable and they go 'oh, that’s great, I can forget about that one now because it’s kind of proved to me that it’s good'. It’s just not like that. Often the opportunities happen because a market or a business has done very badly before because it’s been very risky.”
“The whole context of it having been risky, then there’s this kind of feedback loop that then kind of forces a change in behaviour which then makes the thing less risky going forward but when you look backwards it looks risky. Hence there’s your opportunity.”
“So it may sound like a kind of odd thing to say, but I don’t think there’s any such thing as an individual market or stock where you go 'yeah, 20 years forget about it'. But you can do that in my view if you’re prepared to invest in global stock markets as a whole. So you can make that commitment to global stock markets and go 'yeah, for 20 years I’m going to be alright'. But you’ve got to be flexible and pragmatic and move around inside it.”
Jeremy Lang previously managed UK equities at Liontrust before setting up boutique asset manager Ardevora Asset Management in 2010. The manager currently runs the Ardevora UK Income fund and the Ardevora Global Equity fund.