Ed Meier has sold out of holdings such as Aberdeen Asset Management and is looking for more opportunities among banks and miners since taking over the Old Mutual UK Equity Income fund.
Old Mutual Global Investors (OMGI) announced in December that Ed Meier would be taking over management of the £217.7m fund in December from Stephen Message. Message, who left the firm, had managed the fund since 2009, having joined Old Mutual in 2008.
Meier, meanwhile, joined the firm from Schroders with now-chief executive Richard Buxton and colleague Errol Francis in 2013.
A research analyst and UK equity portfolio manager at OMGI remained part of the highly-regarded UK alpha equity team, he also previously managed funds at Schroders.
The fund has the objective to achieve above average yield with growth in income and capital appreciation.
During 2016, the fund rose by 6.16 per cent compared with a gain of 8.84 per cent for the average IA UK Equity Income sector fund and a 16.75 per cent rise in the benchmark FTSE All Share index.
Performance of fund vs sector and benchmark in 2016
Source: FE Analytics
Over three years, the fund has also underperformed with a 16.64 per cent return in the three years to 31 December 2016, compared with a 19.24 per cent gain for the average IA UK Equity Income fund.
Indeed, the fund was recently downgraded in the semi-annual rebalancing of the FE Crown Ratings in January, which looks at three-year performance as part of its quantitative process. The fund moved from three crowns to two, placing it in the third quartile of ranked funds.
Meier says he was asked to take over the mandate by Buxton, having worked alongside the star manager for 11 years.
“Richard asked me to take on the income mandate and I was happy to do so,” he said. “What it meant was a very different Christmas.”
The investment objective and policy of the fund have remained unchanged, with a clear and distinctive income focus and target. It continues to invest in a portfolio of 50-60 stocks.
Noting the opportunity in the market, Buxton said in December that under Meier the fund was likely to attract further inflows “in a sector dominated by a small number of asset managers”.
Meier says since taking over the fund he has been working on “really nailing down all the processes, to be able to accurately forecast the income generating capacity of the fund”.
The manager says he will make use of the OMGI UK equity team to leverage to identify the best income-generating stocks.
“I can’t think of a better resourced UK team [in the industry] and I think the track records speak for themselves,” he said.
Taking over the fund from previous manager Message, Meier describes the previous portfolio as a ‘barbell’ strategy, with “quite a preponderance for high yielding low grade stocks”.
He says the portfolio also held a number of non-yielding stocks with the potential to pay dividends and a large portion of low-yield stocks.
“Part of the corollary of that was the concentration of income,” he said. “When you look at the contribution to the fund yield, 10 contributors were about 50-55 per cent of the yield.”
Meier has begun looking at diversifying the sources of income describing the process as “an evolution not at revolution”.
“I think there are enough opportunities out there get a bit more growth in income for the fund”, he said. “What we’re going through probably means a few more stocks overall just to get a slightly more built out approach.”
So far, the approach has meant to disposing of one stock – Aberdeen Asset Management – and reviewing one other holding, IG Group.
Aberdeen Asset Management had been one of the top contributors to the fund’s yield, but had decided to sell out of the stock to add to other areas where he felt dividends were more sustainable.
IG Group, meanwhile, has more regulatory challenges as regulators consult on whether providers of contracts for difference should set aside more capital. Ultimately, the manager decided to hold onto the stock until more clarity was provided.
Writing in its end of quarter review in December, Meier noted that the fund had underperformed the index during the last three months of 2016 despite having reacted well to market rotation.
With sector positioning reflecting a reflationary outlook, the fund was overweight in the banking and mining stocks and benefited from underweight exposure to consumer goods.
Looking ahead, the manager says there are opportunities within the banking and mining sectors, previously unloved, for dividend growth.
He says a number of banks have got past much of the pain inflicted by more stringent capital requirements imposed in recent years.
In the mining sector, companies have built up sufficient capital to begin paying out more attractive dividends.
Staying within the IA UK Equity Income sector is a priority for the manager, although it has proved difficult for some managers.
Performance of sector over three years
Source: FE Analytics
The sector stipulates that funds hold at least 80 per cent in equities and “intend to achieve a historic yield on the distributable income in excess of 110 per cent of the FTSE All Share yield at the fund's year end”.
“That overriding discipline of the fund is perfectly appropriate in the UK markets,” Meier said. “Also it means that clients know what they are discussing.”