The issue of fund size is very topical at the moment, with a number of multi-billion pound funds under pressure from some quarters to limit their inflows. Frikkee (pictured) says there is still a place for large-cap focused equity income funds, but says she’s got a far better chance of outperforming than in her previous roles as she can invest in small and mid caps as well as blue chip dividend payers.
“We want to get a good combination between valuation, yield and growth,” she explained. “Running a fund of this kind gives us a wide range of flexibility. Some funds have a yield requirement but it’s not something we have, and the size also helps.”
“We are very pleased to have pushed through the £20m level already. We’re invested in some companies with a high and growing yield, but that are probably too small for the big funds to take meaningful positions in.”
“Take Chesnara, for instance. It has a market cap of £350m and is for that reason below the radar of some of the larger funds out there. It is yielding 5.6 per cent, and is rare in that it’s one of the few companies that’s growing its book as well.”
“If you were running a £2bn fund you wouldn’t be able to hold a 2 per cent position. We can.”
FE data shows that the Smith & Williamson UK Equity Income fund has returned 17.25 per cent since Frikkee took over in July 2013. This compares to 13.9 per cent from the sector average and 9.42 per cent from the FTSE All Share benchmark.
Performance of fund, sector and benchmark since July 2013
Source: FE Analytics
Frikkee previously ran the £2.2bn Newton Higher Income portfolio, which was as large as £2.7bn when she was running it in 2011. The fund had a very strict yield policy of only investing in companies with a yield 20 per cent higher than the All Share, but it has since been relaxed due to concerns over its ability to deliver growth as well as income.
The strong performance of small and mid caps has led to a high level of yield compression in the FTSE 250 and FTSE Small Cap indices, pushing those with a strict dividend policy up the market cap spectrum. Multi-billion pound funds have their hands tied to an even greater extent.
Frikkee says she is able to express her ideas in her current venture – namely a bias towards the recovery in the UK domestic economy, which is heavily represented further down the market cap scale.
“There are plenty of companies out there yielding 5 per cent – not only something like National Grid which doesn’t have that much room to grow,” said Frikkee.
“We want to be in things that have a good yield and have the potential to grow. Our size means we can be a little bit more discerning with the stocks in our universe yielding 5 per cent.”
As well as Chesnaro, Frikkee lists financial services companies Jupiter Asset Management and St James’ Place, and construction business Kentz Corporation as top-10 holdings. All three are in the FTSE 250.
She also has an overweight in companies at the bottom half of the FTSE 100.
Frikkee says a fund like Smith & Williamson UK Equity Income would compliment a holding in a large cap-focused core UK equity income fund.
“There are a lot of funds out there in slower growing, relatively low yielding funds. I think there is a space for that, but we’re doing something different,” she said.
“A lot of the big funds have the same top-10 positions. A lot will have 8 to 9 per cent positions in mega caps, and a tail of much smaller companies with 0.7 or 0.8 per cent.”
“These could become much bigger positions, but at 75 basis points they don’t make a big impact of performance. We want every stock to pull its weight. In many ways we want to be able to ignore the size of the company.”
Smith & Williamson is currently yielding 4.05 per cent, which is above average for the sector. Frikkee targets a competitive yield, but says her emphasis is on dividend growth.
“Dividend growth is going to have to come from companies outside the mega caps, and there is a big link between dividend growth and performance overall,” she added.
Frikkee says the current make up of the fund could still be implemented at £1bn, but thinks assets in excess of this would make it difficult to hold as much in small and mid caps.
Smith & Williamson UK Equity Income has clean share class ongoing charges of 0.91 per cent.