CF Miton UK Multi Cap Income, which is managed by Gervais Williams (pictured) and Martin Turner, soft-closed in November last year at around £270m after Miton Asset Management wanted to slow the pace of flows into the popular product.
At the time, Williams told FE Trustnet that stemming flows into the portfolio would ensure it could still gain access to sub-£25m companies, which is where he was finding where the most attractive opportunities. "As you may know, the fund has a big weighting to small and micro cap stocks. If we are going to retain that bias, then we are going to be restricted if the assets grow much larger," he said.
Miton placed an initial charge on the fund from 29 November 2013 in a bid to slow the new money flowing into the portfolio. However, this charge was removed earlier this month and investors can now access the fund across a number of platforms without paying the initial fee.
“The decision to apply an initial charge on the fund was down to the rate of flows into the fund rather than purely on a capacity basis,” a Miton spokesperson said.
“Despite regular dividend growth in the FTSE 350 trending to zero this year, the fund managers Gervais Williams and Martin Turner believe dividend growth in small and micro stocks is going to rise. They are finding plenty of compelling opportunities in income stocks further down the market cap scale and in order to take full advantage of these opportunities they believe that the fund now has capacity for an additional £60m.”
As its name suggest, the fund is invested across the cap spectrum. However, given Williams’ smaller company expertise the portfolio is heavily weighted to this part of the market with 38 per cent held in FTSE AIM names and 18.4 per cent in FTSE Small Cap stocks.
In their latest investor update, Williams and Turner said there is “something of a game changer” taking place in markets, pointing out that larger companies are caught between flat sales at the top line and reduced scope to increase dividend payouts given their relatively low levels of dividend cover.
“In contrast many smaller companies haven’t been under pressure to pay dividends during the credit boom so their dividend cover tends to be somewhat higher. However, with interest rates lower for longer, many investors are now asking for smaller quoted companies to consider increasing their dividend distributions,” they added.
Smaller companies are arguably in a better position than large caps to lift their dividends, the managers note, as they have higher dividend cover, “unusually” strong balance sheets and scope for sustained growth. These factors are luring investors away from large caps, which may be hugely beneficial to smaller companies’ share prices.
“It is a case of drip, drip, drip so the effect will be difficult to pin down, especially when markets are gyrating about. But overall there is growing investor participation in those smaller companies that are paying good dividend yields, and most especially in those that are able to grow these over time,” Williams and Turner say.
CF Miton UK Multi Cap Income launched in October 2011 and proved a hit with investors. FE Analytics shows its assets passed the £100m mark in July 2013 before surging to £350m at the time of its soft-closure.
Since launch the fund has returned 79.23 per cent, placing it in the first decile of the highly competitive IMA UK Equity Income sector. It is also the second best performing fund in the peer over this time frame, beaten by just 10 basis points by Marlborough Multi Cap Income.
Performance of fund vs sector and index since launch
Source: FE Analytics
Since the fund soft-closed it has slipped down the performance tables, returning 4.46 per cent against the peer group’s 4.69 per cent and ranking 46 out of the sector’s 87 members.
And since its assets peaked at just shy of £400m in February this year, the fund has dropped in the IMA UK Equity Income sector’s ninth decile with a 3.63 per cent loss. Its average peer has lost 0.12 per cent over this time while the FTSE All Share has gained 0.07 per cent.
However, this return profile is to be expected given the sell-off in smaller firms that hit the UK stock market towards the start of the year. Commentators agree that the fund’s underperformance is down to market issues, rather than problems with its size or managers.
Performance of indices over year to date
Source: FE Analytics
Ben Willis, head of research at Whitechurch, held CF Miton UK Multi Cap Income at the time of its soft-closure and decided to maintain a position in the fund since. He says the move to allow more assets into the portfolio does not worry him, as Miton communicated the decision to investors and promised to restore the initial charge when capacity is used up.
“They have some capacity but they’ve said once that’s gone, it’ll soft-close again so it is an opportunity for people who want to tap into Gervais’ expertise and benefit from that. They have been up-front and honest, which is think is the right thing to do.”
Speaking to FE Trustnet at the time of the soft-closure, he pointed out how difficult it is alternative multi-cap income funds that are as attractive as Miton’s.
Willis adds that Williams and Turner’s rationale for the extra capacity - that smaller companies are in a good position to increase dividends - makes sense as they have cash on balance sheets, which they may decide to return it to shareholders. “I can see dividends going up from here,” he said.
Miton says that no changes to the fund’s investment process have been made to accommodate the extra assets. “We will continue to monitor this very closely in order to protect investors and the investment process,” the spokesperson added.
CF Miton UK Multi Cap Income has clean ongoing charges of 0.83 per cent and yields 3.68 per cent.
