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Three-year track record: LF Gresham House UK Multi Cap Income

20 April 2020

As part of 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 LF Gresham House UK Multi Cap Income fund.

JJust as I started to this article, it was announced that the UK’s largest banks have suspended £7.5bn of dividend payments amid the coronavirus crisis.

The move marks yet more pain for UK investors, who have already seen the value of their portfolios plummet and are now set to see their income cut too. At the time of writing, some 25% of FTSE 350 companies have announced cuts. More are expected to follow.

LF Gresham House UK Multi-Cap Income fund has diversification on its side, allowing it to look further down the market-cap scale for opportunities.

The £62m* fund sits in the UK Equity Income sector, alongside a number of giant retail funds – many of which form the bedrock of an investor’s portfolio. Since launching in June 2017, it has returned 6.86%^, compared to an average loss of 19.65% for the sector^.

The fund is managed by Ken Wotton, someone we’ve held in high regard for some time and who is getting an increasing number of followers. He is supported by co-manager Brendan Gulston, with the pair also managing a micro-cap fund. Ken joined Livingbridge, now Gresham House, in 2007 and heads up the company’s quoted investment activity.

Diversification has never been more important – and what I like about this fund is that it has it in spades. The team behind it also know what they are good at and stick to it. As a result, the fund deliberately ignores parts of the market, such as oil and gas, mining and property, as this is not where the team find their edge.

That edge comes in the small-cap space and they use Gresham House’s own business owner network, sector teams, VCT portfolio, broker network and reviews of competitor holdings to create a list of ideas for inclusion.

Companies which make the target list are evaluated on six factors: management and shareholder structure; the company’s strategy and how it links to long-term value generation; market opportunity/expansion; market position and business model; operational and financial performance; and valuation and liquidity. This helps them build a conviction score. This process has been supplemented amid the pandemic with further qualitative assessments and a greater focus on both supply-side and demand-side risk, management preparedness, as well as balance sheet risk, allowing them to gauge the potential for dividend cuts.

The fact only 6.6% of the portfolio sits in companies with a market-cap of £1.5bn or more is refreshingly different, with almost 70% in small or micro-cap holdings*. Recent inflows resulted in the team having a strong cash position of almost 24%*, which they have been very selectively putting to work over the month of March.

Of course, the fund is not immune to the challenges facing the market, but the managers are sticking with their high-conviction businesses which have been proactive and had an open-dialogue with them about their plans. Ken cites top-10 holdings Inspired Energy and Vianet as examples of long-term holdings which have deferred – not cut – dividends. The pair remain in the portfolio with the team welcoming their communication at a time when cash is king.

They’ve also added MoneySuperMarket to their list of holdings, with Ken pointing to the businesses’ market leading position, strong net cash balance sheet, and cash generation as a reliable sign of their dividend stability. They have also met the management team on a number of occasions. The 41-stock portfolio has a current yield of 4.74%**.

I also like the team’s ability to communicate their process and ideas – such as how they manage liquidity. I believe this fund can deliver in the long-term, making it a standout in a very competitive sector.

^ Source: FE Analytics, total returns in sterling from 30 June 2017 to 31 March 2020

*Source: Fund factsheet, 29 February 2020

**Source: FE Analytics, 3 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.

 

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