Artemis Income is the best option for investors who want core UK equity income exposure due to the managers’ flexible approach and focus on total return, according to Psigma’s Daniel Adams, who prefers to use it over the highly popular Invesco Perpetual offerings and the newly launched CF Woodford Equity Income fund.
Star manager Neil Woodford’s decision to leave Invesco Perpetual to set up his own asset management group has been one of the biggest talking points in industry over last 18 months and has caused a huge amount of inflows and outflows within the sector as a result.
However, while the now £5.5bn CF Woodford Equity Income fund has attracted a lot of capital and media attention since its launch in June last year, one of Woodford’s oldest rivals – FE Alpha Managers Adrian Frost and Adrian Gosden’s Artemis Income fund – has steadily grown in size as money has relocated away from Invesco Perpetual High Income and Income.
It is understandable why investors have turned to the now £7.4bn Artemis Income fund, which has seen its AUM increase by more than £1.3bn since Woodford announced his departure in October 2013, given its long-term outperformance.
According to FE Analytics, it has been the third best performing portfolio in the IA UK Equity Income sector since Frost took charge in January 2002 with returns of 219.18 per cent, beating its FTSE All Share benchmark by 80 percentage points in the process.
The managers have underperformed against Neil Woodford’s portfolios over that time, though.
Performance of fund versus sector and index since Jan 2002
Source: FE Analytics
However, while its long-term cumulative returns are strong, certain industry experts and FE Trustnet readers have noted that the four-crown portfolio’s more recent performance has become slightly less spectacular.
While not calamitous by any stretch of the imagination, FE data shows that it is now second quartile over five and 10 years and is underperforming over three.
Source: FE Analytics
Nevertheless, Artemis Income is now the most widely held UK equity income fund with professional investors – as a recent FE Trustnet study highlighted – and Daniel Adams, investment analyst at Psigma and unitholder in the portfolio, says there are several reasons for that.
“There are a number of reasons why we like the fund and one of which is the communication we have with the managers. Artemis has always been very good in terms of their dialogue and therefore we always know how they are positioned and that can be quite difficult to find out from some of the other larger groups,” Adams said.
“The managers also have a very good long-term track record. We used to run Artemis Income in tandem with Neil Woodford but we became concerned with the amount of money he was running at Invesco Perpetual.”
“However, what we like about the Artemis fund is that the managers are able to have a multi-cap focus and they can still move around from large to small-caps when they see opportunities.”
“One of the most important reasons though, is because they are very much focused on total return rather than just income. As much as they want to meet their dividend, they are very much focused on protecting capital as well.”
According to FE Analytics, investors who bought £10,000 worth of units in Artemis Income when Frost took charge would have nearly earned their initial investment back in dividends.
Income earned on £10,000 since Jan 2002
Source: FE Analytics
The fund, which currently yields 3.3 per cent, has also performed very well in terms of its capital preservation characteristics – which is an important feature for income investors.
Our data shows it has had the best risk-adjusted returns in the sector, as measured by its Sharpe ratio, has been top decile for its annualised volatility and top decile for its maximum drawdown – which calculates the most investors would have lost if they had bought and sold at the worst possible times – since its Frost took charge.
Of course, few would doubt the calibre of Frost and Gosden and their long-term outperformance has been impressive.
However, that being said, Woodford is still seen as the most popular equity income manager with FE Trustnet as his CF Woodford Equity Income fund’s factsheet has consistently been one of the most viewed on the website since its inception last year.
As the graph on page one demonstrated, Woodford has also considerably outperformed the Artemis duo from a total return basis over the long, medium and short term.
Nevertheless, Psigma chief investment officer Tom Becket says there is another major reason why the group uses Artemis over CF Woodford Equity Income and Mark Barnett’s Invesco Perpetual funds – because Frost and Gosden’s approach is more flexible.
Both Woodford and Barnett, for example, are renowned for their love of the healthcare and tobacco sectors and have had longstanding overweights in those industries – which have helped the two managers deliver such strong returns for their investors.
Of course, investors will no doubt like the fact both Woodford and Barnett have such strong conviction and it understandable that they have a high level of exposure to those areas if that’s where they see the best value.
Nevertheless, Adams echoes Becket’s views as he likes the managers on the Artemis Income fund’s more adaptable process.
“They are much more contrarian. For instance, they have recently been buying Ashmore Group because emerging market debt now looks more attractive, they have exposure to banks and they have been buying miners,” Adams explained.
“They have a more flexible approach than others and they have implemented it very well. If you looked at the fund 12 months ago, they would have had no mining exposure. They hunt in every corner of the market, really.”
However, Adams also points out that Frost and Gosden’s approach is “very sensible” as though they are contrarian, they avoid areas where balance sheets don’t “stack up”.
For example, he says they are currently underweight oil and gas as the managers are concerned that those companies will have to use up all their cashflow to pay their dividends given the huge fall in the oil price.
Royal Dutch Shell is a case in point, as it’s the managers’ largest negative position relative to their FTSE All Share benchmark.
The final point Adams makes is that, while the fund isn’t exactly small at £7.4bn, Frost and Gosden still have the ability to implement their views and search for opportunities within small, medium and larger companies.
The fund currently has 74.5 per cent in large-caps and 21 per cent in small and mid-caps.
He notes that while the AUM is much bigger than average, it is far smaller than the amount of money Woodford was running at his height and still much less than the amount Barnett is now running on his Invesco Perpetual funds despite the outflows he has had to deal with.
Artemis Income has a clean ongoing charges figure (OCF) of 0.79 per cent.