This is according to manager Gervais Williams, who hopes to take advantage of this trend with his newly launched CF Acuim UK Multi Cap Income fund. Williams believes the majority of income funds pay too much attention to dividend payers in the FTSE 100, but believes this gives him the chance to unearth some hidden gems.
“As you move down the market cap range, many of these companies are less well researched,” he said. “They’re not so well understood, so their prices aren’t as efficient. If you’ve got 25 analysts following Vodafone, there’s very little you’re going to come up with that’s new as an individual. But if you’ve only got one person, or in some cases zero, following a certain company, they could be doing all sorts of things and no-one really notices. So the opportunity for fund managers to take advantage of equity pricing in the markets is much greater.”
“What we are hoping, and we’ve already seen signs of, is that we get involved with companies that are producing very low income; but this year or next year, they’ll produce more, and the year after, loads and loads more. Our success is based on whether we can grow that over the next few years by either three or five or seven per cent.”
Williams’ co-manager of the fund, Martin Turner, says that another major benefit of looking beyond the blue chips is the diversification this brings, citing the fact that just six companies now account for almost 50 per cent of the FTSE 100’s yield. He also said that looking at the All Share gave them access to entirely different areas of the market.
He said: “There are whole sectors in the All Share that aren’t represented, or that are under-represented, in the FTSE 100 and that includes some sectors we really like, like food producers and insurance, providing essential products and services.”
“We see that as a gap for us versus other income funds, which tend to have high sector concentration, often mirroring the FTSE 100 sector splits. This makes other income funds riskier than they might seem.”
Another way the fund increases diversification is through investing a maximum of 1.5 per cent of its portfolio in a single stock. The result of this, Williams says, is: “If we get it wrong, we’ll lose a finger, but we won’t lose an arm. Because of that, the way the share prices fluctuate across the portfolio tends to be very low.”
According to FE Analytics data, Williams has underperformed his peer group over five years, losing 9.22 per cent compared with positive returns of 6.8 per cent from his peer group composite.
Performance of manager vs peer group over 5-yrs
Source: FE Analytics
"Hopefully, as we deliver over three and five years, more funds will get involved with what we do, and we’ll become more significant," Williams added. "It will never be a big fund, though. Neil Woodford’s got nothing to worry about."