Blending funds such as CF Woodford Equity Income, Standard Life Investments UK Equity Income Unconstrained and CF Miton UK Value Opportunities can offer diversified exposure to the UK stock market, according to The Share Centre’s Andy Parson, who is using all three in his top-performing multi-manager range.
Parson has managed the SF Cautious, SF Positive and SF Adventurous funds of funds with Sheridan Admans since their launch in March 2008, over which time they have outperformed their average peer in their respective sectors. The funds had a particularly strong 2015, at a time when bruised investor sentiment and increased volatility created a generally tough environment.
SF Cautious was the highest returning member of the IA Mixed Investment 20%-60% Shares sector after making 7.36 per cent, SF Adventurous topped the IA Flexible Investment sector with 8.97 per cent and SF Positive was in the IA Mixed Investment 40%-85% Shares sector’s third place with 8.74 per cent.
Performance of funds vs sectors over 2015
Source: FE Analytics
Parsons expects that 2016 could be another year of increased volatility and one where returns will be hard to come by – he says that investors who can make 7 or 8 per cent over the year will have “done well”. However, he is confident on the underlying funds in his portfolios and highlights three UK offerings he currently favours.
UK equity income star Neil Woodford has built an enviable track record over his career, which saw him spend more than 25 years running Invesco Perpetual’s flagship Income and High Income funds before founding his own company to launch the now £8.3bn CF Woodford Equity Income fund.
Performance of fund vs sector and index since launch
Source: FE Analytics
The manager tends to perform very strongly in down markets thanks to a bias to defensive blue-chips, often from the healthcare or tobacco sectors. In 2008, for example, Invesco Perpetual Income’s 19.94 per cent fall was 10 percentage points lower than the FTSE All Share’s decline while in 2011 it made an 8.59 per cent gain when the index was down 3.46 per cent.
Parsons said: “The comfort is always knowing that we have someone like Woodford in there – someone who is well versed in investment. People like Neil have run money through a long period of time and have seen a wide range of market conditions, therefore they know how to stick to their investment philosophy and give investors that reassurance.”
He also highlights that Woodford holds a number of businesses that are in their embryonic stage and need capital investment alongside his core income producing stocks, saying this is an “exciting” element to the manager’s portfolio. Current early-stage holdings include washing machine technology business Xeros, molecular diagnostics firm Oxford Nanopore and rural broadband network provider Gigaclear.
CF Woodford Equity Income has a clean ongoing charges figure (OCF) of 0.75 per cent and is yielding 3.45 per cent.
Standard Life Investments UK Equity Income Unconstrained
This £1.1bn fund has been headed up by FE Alpha Manager Thomas Moore since January 2009 and, as its name suggests, is built without regard to the composition of a benchmark. Over the manager’s time on the portfolio, it has returned 220.81 per cent – which is double the rise of the FTSE All Share and ranks it fourth in the IA UK Equity Income sector.
Performance of fund vs sector and index under Moore
Source: FE Analytics
Parsons said: “We've been invested with Thomas Moore for five or six years. We really like him and with the unconstrained mandate, he can go wherever he sees the best ideas. When you speak to him, he's so passionate about the investments he holds.”
“He also wants to move away from following the herd and holding what every other UK equity income manager would hold. Thomas blends very nicely with something like Woodford.”
Moore’s approach looks for companies that are in an improving situation but this has not yet been recognised by the wider market. This means that he is not steered towards the usual dividend-paying stalwarts and has greater exposure to stocks offering a potential source of dividend growth.
The portfolio’s largest holding is BT at 4.8 per cent of assets, while the top 10 also includes Sage, Aviva, L&G and RELX Group. Its biggest sector allocation is to financials at 31.4 per cent, followed by consumer services at 20.8 per cent and industrials at 17.9 per cent.
The manager has a cautious view of the UK market at the moment, given the ongoing risk of dividend cuts. He told FE Trustnet last year: “At the moment, it’s almost a perfect storm for income. If you’re a traditional income investor you have to worry about big oil; you have to worry about mega-caps’ earnings downgrades and the cash flow shortfall of companies like Glaxo; and on top of all of that, you have a rate rise leading to a de-rating.”
Standard Life Investments UK Equity Income Unconstrained has a 1.15 per cent clean OCF and is yielding 4.17 per cent.
CF Miton UK Value Opportunities
This £836.6m fund was only launched in March 2013 but since then has made a 25.93 per cent total return, which ranks it second in the IA UK All Companies sector where the average gain has been 16.21 per cent. Fund managers George Godber and Georgina Hamilton honed their process on the successful FP Matterley Undervalued Assets fund before they joined Miton.
Performance of fund vs sector and index since launch
Source: FE Analytics
Parsons said: "When it comes to managers who excite me and give me something a bit different, I love George and Georgina at Miton. We've been followers of theirs for the three-and-a-bit years, investing in the fund when it was well below £100m.”
“We just think they have a fantastic value approach. There's a lot of argument over exactly what 'deep value' is, but for me it comes down to a manager looking at a business, understanding its financials and working out a value for that business, versus what it is trading at in the market. It's not just about going against market sentiment. They might not be on as many people's radars as other names but to me, these are tomorrow’s stars."
Godber and Hamilton’s process looks for businesses that are trading at below their break-up value then subjects them to a ‘safety check’ that takes into account financial strength, in order to ensure the portfolio has a focus on capital preservation. This approach has led them to stocks such as Bellway, Barratt Developments, WHSmith, JD Sports Fashion and Vertu Motors.
CF Miton UK Value Opportunities has a 0.83 per cent clean OCF.
