Investors keen to diversify their UK equity income exposure tend to blend a predominately large-cap portfolio such as Artemis Income or Invesco Perpetual High Income with a specialist small-cap mandate like Unicorn UK Income or Marlborough Multi Cap Income.
However, for those looking to bridge the gap, Rees says Luckraft’s £120m AXA Framlington Monthly Income fund – which typically has a third in large, mid and small-caps – is one of the very few genuine multi-cap options in the sector.“For investors looking for a one-stop-shop, I think this is a good proposition,” Rees (pictured) said.
“I know the manager reasonably well as we used to hold the fund in our portfolios. One of the issues he has had to deal with is the development of more specialist funds in the sector like Unicorn, PFS Chelverton and Marlborough.”
“While Luckraft does have a bias towards small-caps, these other funds tend to invest in more niche areas so most investors will look to combine them with one of large-cap equity income funds,” Rees said.
Luckraft was one of the first managers in the sector to offer a genuine multi-cap approach to the UK’s dividend paying market, adding that few – if any – have as much experience as him in this area.
One look at the manager’s top-10 and it’s clear to see he is very much multi-cap in his approach.
As well as significant positions in mega-caps such as Royal Dutch Shell, BP and GlaxoSmithKline, he includes small cap companies Hilton Food Group and KBC Advanced Technologies, as well as FTSE 250 tech business Premier Farnell.
Source: FE Analytics
Luckraft took over AXA Framlington Monthly Income in September 2002. In the years leading up to the financial crisis, he was one of the best-performing managers focused on UK equities, building on his successes at Artemis in the 1990s.
According to FE Analytics, the AXA Framlington fund delivered top quartile returns in the IMA UK Equity Income sector, and beat its FTSE All Share benchmark, in 2003, 2004, 2005 and 2006 and has outperformed in eight of the 12 calendar years that Luckraft has been in charge.
However, the fund’s performance during the crisis years of 2007 and 2008 has heavily impacted on its longer-term numbers.
Performance of fund vs sector and index since Sep 2002
Source: FE Analytics
Our data shows that the fund was the sector’s second worst performing portfolio in 2007 with losses of 13 per cent, and was the third worst performer in 2008 when it fell an eye-watering 45 per cent.
Performance of fund vs sector and index between 2007 and 2008
Source: FE Analytics
Luckraft says that the major reason for those losses was his over-exposure to highly-geared companies, though it is a mistake he says he has learnt from.
“I held a lot of companies that offered decent yields but also had quite high levels of debt, which is absolutely no problem in most environments. I wasn’t expecting the economy to have as massive a heart attack as it did,” Luckraft (pictured) said.
“The main things I have learnt are how I construct the portfolio and the fact that the market can go through a much bigger downturn than you might anticipate.”One example of a stock which was hit particularly hard during the crisis was Topps Tiles, according to Luckraft, who has held the company in his portfolio for many years.
Our data shows the stock fell more than 80 per cent during the downturn.
“It did run with cash on the balance sheet, they came under significant pressure to return cash to shareholders and they began to do so,” the manager explained.
“However during the downturn they saw volumes fall by 20 per cent which meant that it had to cut its dividend back while they repaired the balance sheet. They are now doing well again having 28 per cent market share in a market that has not yet peaked.”
The fund has bounced back since the financial crash and has outperformed over a cumulative five year period.
Rees says that Luckraft’s relative outperformance could have been even greater had it not been for the need to raise cash and meet significant redemptions in 2009 and 2010, which diluted returns as markets rallied.
Still, FE Analytics data shows the AXA fund has beaten its sector and benchmark over three years, and has been the second best performing sector over the last 12 months.
It also currently tops the sector in 2014 with returns of 6.3 per cent.
Performance of fund vs sector and index in 2014
Source: FE Analytics
Luckraft says the fund’s recent strong run has been as a result of successful stockpicking rather than any top down view on the market.
He points to a high weighting to Skyepharma – which is up 120 per cent year to date – and his decision to up his exposure to the FTSE 100 as two standout reasons for the fund’s strong run.
“I never take thematic views because I think if you get that wrong, you get the whole portfolio wrong,” Luckraft said.
“I have always had a multi-cap approach. However, one of the most important disciplines a manager can have is valuation, and some mega-caps just got very cheap.”
Luckraft currently holds roughly 30 per cent of his portfolio in the FTSE 100, 10 per cent in the FTSE 250 and more than half spread across FTSE Small Cap and AIM-listed stocks.
AXA Framlington Monthly Income has a yield of 3.66 per cent and, as its names suggests, pays out dividends every month, making it a good option for investors who regularly rely on income from their investments.
The fund has clean ongoing charges of 0.85 per cent.
