The manager of the £307m RWC Enhanced Income Fund recently launched a new fund - the RWC Global Enhanced Dividend Fund.
Lance says that he is finding it hard to find stocks good enough to buy, as most fail either his quality or value criteria.
“We are looking for companies with a history of good returns on capital, strong balance sheets strong cash generation that come at reasonable starting valuations but there are not many areas of the markets where you can find all of them,” he said.
“There are quality companies out there but they are looking very expensive and there are value companies but they are not very good quality.”
“It’s very tricky to find both quality and value at the moment, the only place where see we see this is the healthcare sector.”
“We are expecting over the next year to see a lot of individual stocks coming back to value opportunities but the cash will be there until we see them.”
Lance says the the healthcare sector has become especially attractive following a recent increase in M&A activity in the past few weeks.
Hi RWC Enhanced Income fund has two big name pharmaceutical stocks as top ten holdings - AstraZeneca and GlaxoSmithKline with a combines value of over 10 per cent of the total portfolio.
AstraZeneca has fared particular well in the past few weeks, with its share jumping 23.19 per cent after it was revealed the company was subject to an unsuccessful takeover bid by rival US firm Pfizer.
Performance of stock vs index over 2 weeks
Source: FE Analytics
The fund, which Lance runs with John Teahan and Nick Purves, invests predominantly in UK equities, but sits in the IMA Specialist sector because the managers like to take a more flexible approach to the market. This means it is often overlooked by investors looking for UK equity income exposure.
It has underperformed compared to its benchmark - the FTSE All Share – over three years, returning 15.27 per cent compared to 27.46 per cent.
Performance of fund and benchmark over 3yrs
Source: FE Analytics
However, Lance says the fund saw huge inflows in 2013, bringing it close to full capacity, which propelled the launch of the new fund.
The new fund will mirror the strategy of the RWC Enhanced Income fund but with a more global focus which will allow a greater capacity.
It has attracted approximately £75m in inflows ahead of its launch and aims to achieve a total return consisting of the income and capital gain with less volatility than equities markets and traditional equity funds.
There will be an emphasis on defensive quality stocks which will form the basis of the portfolio mostly in the telecoms, healthcare and consumer staples sectors, the manager explains.
“The geographical spread will be approximately 20 per cent in the UK, 30 per cent in Europe and 30 per cent in the US, 5 per cent in developed Asia and 15 per cent in cash, but the stock-picking is all from a bottom up approach,” he said.
“We don’t want to have exposure to volatile sectors or regions so we will be avoiding emerging markets.”
John Teahan, who co manages the RWC portfolio says the fund will hold cash when there is a lack of companies meeting their investment criteria which are also available at low valuations.
“The elevated cash level lowers volatility and gives the managers the ability to invest in high quality equities once valuations improve,” he said.
“Given an increased opportunity set available from a global universe allows us to evolve our offering in a number of ways. We are able to flatten the holding structure which reduces stock specific risk and volatility.”
“We have created an equity strategy that exhibits substantially lower volatility than equities and substantially reduced the real risk; that of a permanent impairment of our investors’ capital. Investors should be aware that we are less concerned about measures such as performance relative to an index and tracking error.”
“The call over-writing strategy further reduces volatility, as in a falling market the fund will keep the premiums from the option strategy.”
Lance says the fund will have a broader remit allowing it to avoid many of the risks associated with stock and sector concentration associated with UK funds.
“For example in pharmaceuticals where the UK opportunity is limited, a global approach allows us to access companies such as Elli Lilly and Johnson & Johnson which are just as appropriate for what we are looking to achieve.”
“We have always used as much of our overseas exposure as possible in our existing funds to alleviate this problem and this new mandate is unconstrained allowing further diversification.”
“We are still looking for similar types of opportunity as we have done for many years; there are just more of them globally.”
