Continuing her ongoing series for Professional Paraplanner looking at funds which have recently obtained a three year track record, Juliet Schooling Latter, research director, FundCalibre looks at the GAM UK Equity Income.
“You can run but you can’t hide”
The phrase originally coined by heavyweight boxing great Joe Louis in the 1940s, has been used countless times since in songs and books – it is also an apt description of financial markets at the moment.
The UK Equity Income sector is a prime example, as it looks to navigate the plethora of dividend cuts and rights issues in the wake of the coronavirus and associated economic shutdown.
Much of the narrative so far has been heavily skewed towards looking at other dividend paying assets for an income. But there is also an argument that this is the perfect time to remind investors that dividends are the primary driver of long-term returns
“Clearly, the equity income model has come under pressure. However, when compared to alternative sources of yield, we believe equity income investing remains attractive.”
That’s the view of GAM UK Equity Income managers Adrian Gosden and Chris Morrison, who point to UK interest rates at historically low levels, cash yielding next to nothing and the fact the UK government sold its first negative-yielding government bond in May this year, as proof the grass is not necessarily greener elsewhere.
Adrian is known for his time at Artemis, where he successfully managed the Income and High Income funds with Adrian Frost, before launching the GAM UK Equity Income fund in October 2017. The fund is multi-cap in nature, with almost half of the portfolio sitting in both mid and small-cap companies*. This flexibility is supported by the fact Adrian is not afraid to adjust the portfolio around rapidly if better opportunities appear.
The process for selecting and valuing companies is based on how much spare cash each business generates and their ability to pay dividends with this cash. The investment process sees the managers filter for companies with good cash-flow metrics as well as an assessment of the industry a company operates in. Meetings with shareholders and management are also essential with the team carrying out around 200 meetings a year. The managers are also patient in making sure they invest in a company at the right price.
Adrian can and will take full advantage of his 20% ‘non-standard’ holdings allowance, meaning he could at various stages hold some European companies and potentially bonds if they offer a better return profile than a company’s shares – diversity in essential in these uncertain times.
The portfolio has a core style overall but is tilted towards the value end of the market. Value, as we know, has suffered yet again on the back of this crisis. However, the managers believe this is an opportunity to ownshares in good quality companies with cyclical earnings.
“Holding companies in resilient sectors, regardless of whether they have cut their dividend, will prove beneficial. Investors who understand liquidity and balance sheets, and support rights issues in the appropriate businesses, will be rewarded when taking a longer-term view,” they said.
The managers expect companies with the right business models to be back to 2019 earnings levels in 2021/2022 – adding that dividends should return within 12-24 months, although they may be less generous in some cases.
“The economic shape of the Covid-19 episode presents an opportunity for investors to buy and hold stocks at attractive levels and generate returns, particularly on a two-year timeline. Despite the harsh environment, we foresee dividends returning and continuing to be the most important driver of total equity returns over the long term.”
The fund has an historic yield of 6.7%*, while the ongoing charges figures stands at 0.6%*.
Performance has come off in recent months, as both the value tilt and the bias towards smaller and medium-sized companies have taken their toll. But, backed by a highly experienced and successful manager, the flexibility and diversification of this fund make it a strong alternative for those who have the patience to back the UK’s dividend-paying companies in the long-term and it remains on our watch list.
*Source: fund factsheet, 30 April 2020
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Juliet’s views are her own and do not constitute financial advice.
