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FE Alpha Manager Lall: Three ‘rules’ income investors don’t need to follow

17 January 2017

Siddarth Chand Lall, who heads up the £1.4bn Marlborough Multi Cap Income fund, tells FE Trustnet how he has managed to generate stellar income and growth for investors over the long term.

By Lauren Mason,

Senior reporter, FE Trustnet

Adopting a flexible investing style, looking beyond the mega-cap ‘stalwart’ stocks and ensuring every single holding in the portfolio pays a dividend are some of the ways Marlborough’s Siddarth Chand Lall has generated superior income and growth for investors over the years.

The FE Alpha Manager, who heads up the four crown-rated Marlborough Multi Cap Income fund, has returned 92.75 per cent since launch compared to his average peer’s return of 62.66 per cent.

Performance of fund vs sector since launch

 

Source: FE Analytics

Not only this, if an investor had placed £10,000 into the fund at launch, they would have received £3,115.08 in income alone.

“The Marlborough Multi Cap Income fund was launched in 2011, partly because investors asked us, ‘given Marlborough has such a good track record in small- and mid-cap investing, can’t you do something similar in income? Can we have a version of Giles [Hargreave’s] Special Situations fund, where you cherry-pick certain ideas and generate dividends?’” Lall (pictured) said.

“We thought about it and looked at the equity income sector. We realised that, actually, the bulk of those funds were all investing in FTSE 100 stocks. There’s nothing wrong with that at all, it’s just that, from our end, we thought this might be a genuinely different product.

“Why would it be any good? If you believe in the premise that earnings growth could be superior among smaller companies relative to large-cap companies then, even on a constant pay-out ratio for the dividend, you get the dividend growth as well.”

The manager says this has worked well for the fund as, each year since launch, it has achieved a significantly higher yield than the FTSE All Share (funds in the IA UK Equity Income sector have to yield 10 per cent more than the index over rolling three-year periods). In fact, the fund has achieved no less than 127 per cent of the FTSE All Share’s yield on an annual basis.

“Given it is an income fund rather than a growth fund or a total return fund, we really focus constantly on that,” Lall said. “That’s not to say that we’re going to purposefully sacrifice capital as we are totally mindful that capital growth is important.

“There will be years where it’s not as impressive but, generally speaking, we try and do both.”

In the below article, he lists three common investing ‘rules’ that he doesn’t follow and still achieves stellar growth and income through investing in UK equities.

 

You should adopt a yielding/non-yielding ‘barbell’ approach

Lall says the minimum yield requirement needed to remain in the IA UK Equity Income sector isn’t an easy target. The way he manages to achieve it is not to lose sight of the fund’s primary objective and aim for significant capital growth.

“It’s very tempting – I could buy companies like Fever-Tree and some of these IPOs where there will be no yield on it for a while,” he said.

Performance of stock since IPO

 

Source: FE Analytics

“My point is that I could buy a whole host of growth stocks and create what is called a barbell portfolio construction, where some stocks don’t yield anything and some stocks have very high yields.


“But the danger with that is your high-yielding stocks could at some point disappoint you and become medium-yielding stocks, then the blended average on your portfolio actually drops below your target.

“It’s a vicious cycle because your zero per cent stocks aren’t contributing anything, so you then have to add more and more high-yielding stocks and you have yourself in a bit of a fix because the number of stocks you’re relying on for the dividend contribution is increasingly less.

“I just like everything to contribute and, if it starts to disappoint, we like to get out and get a better idea.”

 

You have to stick to one investing style

While many managers pride themselves on maintaining their style bias, Lall says he is open to holding value plays as well as higher quality stocks.

“I’m amazed at some of the literature that comes out saying there are no fresh ideas or it’s the end of small-cap, for instance. At the moment, we currently have 15 ideas written down and ready to go,” he said.

“Within this portfolio, there really are multiple strategies. The income is there as the primary objective, but there are many strategies within it.

“For instance, we could hold an operating model or a business that is generating so much cash, it doesn’t need to have more than a certain amount after it’s already invested in growth, so what’s left over can be handed out.

“An example of that would be something like Hastings, where it’s a fairly lean operating model as 90 per cent of its leads are all from online. So, after a certain point, it can actually hand the cash back.

“My point is that we can also be contrarian. We can then buy a stock where, if we can see a very clear restructuring or a turnaround story, we can hold that as well.”

While Lall admits this approach is relatively unusual, he says that style flexibility adds a further layer of diversification to the 137-stock portfolio.

“Some people say they have their 100 stocks and they don’t want to see any more companies and that may or may not work, whereas what we’re trying to do is have huge diversification without introducing ‘di-worse-ification’,” he added.

“So keep to your process and stick to the quant side of it, ensure that on the whole the stocks you’re choosing have good balance sheets and, where they don’t have good balance sheets, that there’s a reason for it.”


You need to hold mega-cap ‘stalwarts’ to maximise income

While Lall does hold FTSE 100 stocks in his portfolio, he says it is possible to achieve the yield requirements for the IA UK Equity Income sector without relying on the dividend-paying blue-chips that pay steady streams of income.

In fact, an article published by FE Trustnet this morning highlights Marlborough Multi Cap Income as one of 19 funds in the sector that hold one or fewer of the top 10-yielding FTSE 100 stocks as one of its 10 largest holdings.

“It’s such a big market that, for us, rather than choose from 90 stocks that can qualify to pay the dividend, we have 600 or 700 stocks we can choose from, so it’s a very wide opportunity set,” the manager said.

“I’m not here to put any other type of strategy down. Last year, large-cap was the way forward because you had a currency effect boosting it.

“This hasn’t been the case with the small- and mid-cap stocks but, that said, we do have some companies that have foreign earnings. It’s not black and white. We saw stocks such as Victrex, Tate & Lyle, Photo-Me all thrive as a result of that and we continue to hold them.

Performance of stocks in 2016

 

Source: FE Analytics

“It is so easy to point fingers and I’m not here to say you can’t buy large-caps for income because we do hold a lot of large-caps as well. We have close to £150m invested in them.

“It’s just we think that, as a portfolio approach – and especially given this remit to outperform the FTSE All Share’s yield – there is a more interesting angle by having a bias towards small- and mid-caps.”

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