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Buying opportunity has opened up in UK equity income funds, says Ricketts

27 October 2014

Margetts’ Toby Ricketts tells FE Trustnet why he has been taking risk in his portfolios by adding to UK equity income funds following the sell-off.

By Alex Paget,

Senior Reporter, FE Trustnet

A buying opportunity has opened up in large-cap UK equity income funds following the recent sell-off, according to Toby Ricketts, who has been topping up his exposure as valuations are attractive and because a stronger dollar will help overseas earnings.

The UK equity market has trended downward over the last two months over concerns about slowing growth and the possibility of deflation in the eurozone, the end of QE in the US and the threat of the Ebola virus.

The FTSE All Share has fallen 6.6 per cent since early September and is now down 2.4 per cent year-to-date.

Performance of index in 2014

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Source: FE Analytics

While many experts expect volatility to persist as macroeconomic headwinds continue, Ricketts – who heads up the Margetts fund of funds range – views the current market in a similar light to the one presented to investors after the eurozone-inspired sell-off in 2011.ALT_TAG

He has therefore used the correction as an opportunity to raise his overall equity exposure to close to maximum levels and one of the areas he has been concentrating on is the IMA UK Equity Income sector.

“We have been putting money into large-cap UK equity income funds. They have pulled back a bit over the last couple of months and valuations are attractive,” Ricketts (pictured) said.

“The strength of the US dollar is also a positive for large-cap companies as it helps their foreign earnings. On top of that, energy costs have come down recently which is, again, good for earnings. All this adds to the hope that dividends will be maintained.”

Ricketts uses a variety of funds within the IMA UK Equity Income sector across his portfolios and one which he has been topping up has been Martin Cholwill’s Royal London UK Equity Income fund.

An FE Trustnet article highlighted that the £1.4bn fund, which has five FE Crowns, had been one of the worst-hit portfolios in the sector during the recent sell-off, but it has recovered over recent days and is now up against the sector and the FTSE All Share since September.

Royal London UK Equity Income is a FTSE 350 portfolio, though on the grounds of attractive valuations Cholwill currently has a high weighting to mega-cap multinationals.

His list of top 10 holdings includes HSBC, Royal Dutch Shell, GlaxoSmithKline, AstraZeneca and British American Tobacco which, combined, make up 25 per cent of the portfolio.


Cholwill has a decent long-term track record, having taken over the fund in March 2005.

According to FE Analytics, Royal London UK Equity Income has been the sector’s third best performing portfolio since Cholwill has been at the helm with returns of 136.56 per cent, beating the FTSE All Share by 45.29 percentage points in the process.

Performance of fund vs sector and index since Mar 2005


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Source: FE Analytics

The fund also boasts top quartile returns, and has beaten its benchmark, over one, three, five and seven-year periods.

It has outperformed the sector in every calendar year since Cholwill has been in charge and has only underperformed the FTSE All Share in one of those, which was in 2007.

It is one of the few funds in the sector that publishes its dividend history and, according to its factsheet, it has increased its pay-out over the last year.

The fund yields 3.87 per cent and has an ongoing charges figure (OCF) of 0.66 per cent.

Ricketts has also been adding to his other income funds such as Ardevora UK Income, Threadneedle UK Equity Income and Premier Income. He hasn’t been topping up his weighting to Schroder UK Alpha Income, however, due it its recent underperformance and as the manager, Matt Hudson, has just been handed the Schroder UK Opportunities fund following Julie Dean’s departure.

Ricketts has long been bearish on gilts but on the back of their recent performance and as they currently have very low yields – 10-year gilts yield 2.23 per cent at the time of writing – he thinks investors are making a big mistake if they buy into the market now.

Performance of index in 2014


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Source: FE Analytics


“I couldn’t explain why gilt yields were so low earlier in the year and I can’t explain now,” he said.

“We have avoided that part of the market and watched in pain this year. However, we won’t be adding to government bonds because the problem can be that you capitulate and buy in too late. Although it isn’t exactly the same, the last example of something like this was with the ‘tech bubble’ because I think [the rally in bonds] is running out of road.”

“There was a good argument to be underweight bonds at the start of the year and the argument is even stronger now.”

Ricketts has managed funds of funds since June 1992 and currently heads up five portfolios.

According to FE Analytics, he has returned 102.65 per cent since the turn of the century, beating his peer group composite which has returned 60.46 per cent over that time.

One of his best relative performers has been the Margetts Venture Strategy, which has been the third best performing portfolio in the IMA Flexible Investment sector over 10 years with returns of 156.91 per cent.

Performance of fund vs sector over 10yrs

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Source: FE Analytics

The fund has a large weighting to the developing world and counts First State Global Emerging Markets Leaders, Aberdeen Emerging Markets Equity, Fidelity Emerging Markets, Schroder Asian Income and Somerset Emerging Markets Dividend Growth as top 10 holdings.

It has an OCF of 1.77 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.