Artemis Income, Majedie UK Equity and Investec UK Alpha are among several funds Quilter Cheviot’s Simon Doherty has backed for the UK exposure in its managed portfolio service (MPS). 
Many people are concerned over the prospects for UK equities, with uncertainty raised by a minority government, a lack of clarity in Brexit negotiations and the spectre of rising inflation.
Yet, Doherty, who is lead manager of the MPS, has upped his exposure to UK equities from underweight to neutral during the latest rebalance, as he said he was not bearish on the prospects of the UK economy.
“There hasn’t been a huge amount of change in overall positioning. The UK we were slightly underweight but we have brought that up to essentially a neutral position across the strategies,” he said.
“We are of the view – driven by the asset allocation view we have as a business – that while our preference is still for international equities we’re not as gloomy on the outlook for the UK as perhaps some others are.
“We’re not particularly bearish on the outlook for the UK so we have put a little bit of cash to work in the latest rebalance.”
Below, Doherty tells FE Trustnet which UK managers he owns and has added to in the latest rebalance.
The Quilter Cheviot Balanced managed portfolio has a 32.6 per cent weighting to UK equities and one of the largest holdings is Adrian Frost and Nick Shenton’s £6.47bn Artemis Income.
The four crown-rated fund is 76.2 per cent weighted to large caps and 19.2 per cent in mid caps with 2.1 per cent in cash.
In the latest factsheet, the managers said the recent outperformance of larger companies including Vodafone and AztraZeneca meant it has pulled back from being fully invested, having trimmed a number of positions.
“A core UK equity income holding within the strategies, one focusing on companies with strong free cash flow and robust balance sheets,” Doherty said.
“The fund has performed well year-to-date, benefiting from its underweight exposure to some of the poorer performing sectors as well as its overweight position in stock specific names such as 3i and SSP Group.”
The fund is overweight financials (34.3 per cent) with 17.9 per cent in consumer service companies, but has just 1.1 per cent in technology and 2.4 per cent in utilities.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
So far this year, it has been a top quartile performer, returning 9.49 per cent, while over the longer term it has also outperformed, returning 94.95 per cent over the past decade, as the above chart shows.
The fund has a yield of 3.9 per cent and a clean ongoing charges figure (OCF) of 0.79 per cent.
Another large position is the £4.1bn Majedie UK Equity fund, run by Chris Field, James de Uphaugh, Matthew Smith and Richard Staveley.
“Our joint-largest holding within the UK, we rate highly Majedie’s collaborative, team-based approach, one that combines top down input with in-depth bottom up research,” Doherty explained.
“Having performed strongly during 2016 (a period that proved to be a very difficult year for many managers), the fund has lost some ground year-to-date but our conviction remains unchanged.”
The fund returned 21.27 per cent last year, top quartile in the IA UK All Companies sector, though it has struggled this year, returning 4.39 per cent.
As with the Artemis Income fund, it has also performed well over the long-term, returning 128.02 per cent over the last decade, as the below chart shows.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
The fund’s largest weighting is to oil & gas producers (12.8 per cent), with Shell and BP its top two holdings. Banks represent its second largest sector position (10.8 per cent).
It has a yield of 2.46 per cent and an OCF of 0.77 per cent.
The only passive vehicle in the portfolio is the five crown-rated L&G UK 100 Index Trust, which Doherty has introduced since taking over the fund in June 2016.
Last year many active managers struggled to outperform as unloved areas of the market including commodities and financials were among the top performing stocks.
As such, the manager re-evaluated the portfolio, choosing to include the passive vehicle to anchor some of the higher risk, more concentrated exposures.
“Our sole ‘passive’ exposure within the strategies’ UK equity allocation, held to partially offset some of the more aggressively overweight mid- and small-cap positions taken by our active managers,” he said.
In an article last month he noted: “We essentially gained this exposure to certain sectors and areas of the market that typically a lot of managers have been quite materially underweight in recent years be that oil & gas, basic materials or financials among a number of other examples as well.”
The £614m L&G UK 100 Index Trust has a yield of 3.4 per cent, an OCF of 0.1 per cent and a tracking error of 3.46 per cent over the last decade.
Returning to active funds, Doherty also holds Richard Buxton’s £2.25m Old Mutual UK Alpha, which he added to the portfolio in August last year, shortly after he took control of the models.
“A more recent addition to the strategies, the fund remains a differentiated, large-cap dominated UK-only fund, with a low turnover, concentrated approach,” the manager said.
The fund currently holds 33 positions with HSBC, Shell and GlaxoSmithKline its top three weightings. Overall, it is 25.6 weighted to financials, 15.4 per cent to consumer discretionary stocks, and 12 per cent to the healthcare sector.
Speaking last month, Doherty explained: “One of the things that I was keen to implement was to ensure a lot of close relationships with our investment fund research team.
“A fund that has always been highly recommended and a high conviction idea was Richard’s fund but it wasn’t in the managed portfolio service strategies at the time.
“I felt that was an opportune moment given the difficulties that we’d seen in terms of performance and some of the characteristics of that fund that we wanted to introduce.”
The fund has had a better period recently, up 18.96 per cent in the last year, beating both the index and sector and is ahead of both over the last five years.
However, the manager is quite contrarian and can have prolonged periods of underperformance. As such, the fund has underperformed over the last three years.
Old Mutual UK Alpha has a yield of 3.04 per cent and an OCF of 0.85 per cent.
Another ‘Alpha’ fund, Doherty is invested in the £1.6bn Investec UK Alpha run by Simon Brazier. “A fund that endured a difficult 2016 but has performed strongly year-to-date,” the manager said.
Indeed, the fund returned 8.84 per cent last year – below both the sector and the benchmark – though it is in the top quartile of the IA UK All Companies sector this year having returned 10.51 per cent.
Performance of fund vs sector and benchmark YTD
Source: FE Analytics
“Comprising high quality growth-orientated companies, albeit within a strong valuation framework – manager Simon Brazier has demonstrated an ability to generate steady excess returns on a consistent basis over an extended time period,” said the manager.
The fund is 20.87 per cent invested in industrials with 18.7 per cent in financials and 15.5 per cent in consumer services.
Its largest holding is Reckitt Benckiser Group (3.5 per cent) with Shell (3.2 per cent) and DS Smith (2.9 per cent) rounding out the top three positions in the 58 holding portfolio.
The fund has a yield of 1.72 per cent and an OCF of 0.84 per cent.
One of the smaller positions in the portfolios is the five crown-rated CF Woodford Equity Income run by FE Alpha Manager Neil Woodford.
The £10.1bn fund has been a top performer over the last three years, returning 39.24 per cent and was recently given the top crown rating at FE’s latest rebalance.
“Robust performance year-to-date after a difficult 2016, the fund remains concentrated and unconstrained in style,” Doherty said.
“Manager Neil Woodford holds the view that the outlook for the UK economy has become too pessimistic, as demonstrated in the extremely cheap valuations he sees priced into domestic names.
“This has led to some notable portfolio activity in recent months, though we feel the core characteristics for which Woodford well-known remain unchanged.”
In a recent article, Woodford said: “[The] consensus view is that the UK is a very challenged economy because of Brexit and because of political uncertainty. At the moment that’s what people are focused on, and they’re manifesting those views by overvaluing some stocks, and equally undervaluing others.”
Indeed, while holdings such as AstraZeneca (8.74 per cent) and Imperial Brands (6.23 per cent) have been in the fund’s top 10 holdings for some time, more cyclical names have been added in recent months.
The fund has a yield of 2.92 per cent and an OCF of 0.75.
River and Mercantile UK Equity Smaller Companies
The final fund is Doherty’s only direct exposure to UK smaller companies: the £825m River and Mercantile UK Equity Smaller Companies.
The fund, run by FE Alpha Manager Philip Rodrigs, makes up 1.2 per cent of Quilter Cheviot’s balanced portfolio.
“Our dedicated UK small-cap allocation, manager Philip Rodrigs has performed strongly year-to-date, a function of holdings in names such as Boohoo.com, Fevertree and Conviviality, amongst others,” the manager noted. “An underweight allocation to oil & gas has also benefited relative returns.
“The fund differs from many peers within the small-cap space in its focus on the smaller end of the market cap spectrum, generally holding far fewer FTSE 250 names than other small-cap managers. We rate the team’s bottom-up investment approach highly.”
The fund has been a top quartile performer over both five and 10-year periods, returning 239.72 per cent over the last decade.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
It should be noted that the fund has been managed by several managers over the period, with Rodrigs taking over in September 2014.
During his tenure, the fund has returned 47.47 per cent – ahead of both the sector average and the benchmark but in the second quartile of the IA UK Smaller Companies sector.
The fund has a yield of 1.08 per cent and an OCF of 0.83 per cent.