Driving force behind top fund thinks small...for big returns
THE desire for income from a portfolio of shares has never been greater among investors. This huge appetite has prompted Woodford Investment Management to launch a fund next month paying an income of around five per cent.
The Income Focus Fund, to be run by hugely respected manager Neil Woodford, will complement the Woodford Equity Income fund with more emphasis on extracting dividends from companies listed abroad. About 20 per cent of the fund will be invested overseas.
Continued demand for equity income is also a key reason why rival investment house Miton Asset Management is appearing on the radars of both advisers and investors. Since Gervais Williams, formerly of Gartmore, joined the firm six years ago, Miton has gained a reputation for managing income funds effectively. What makes it slightly unusual is the approach it takes to find incomefriendly UK investments.
Unlike many rivals, which concentrate on dividend payers in the FTSE100 Index, Miton also looks for income among smaller firms found in the FTSE AIM, Small Cap and Fledgling indices.
Nowhere is this approach more manifest than on Miton UK Multi Cap Income, which Williams has managed with Martin Turner since it was launched in October 2011. The biggest chunk of the 150-strong portfolio is concentrated on AIM stocks.
It seems to be working. Analysis by investment experts at Sanlam Private Wealth identifies Miton’s as the ‘best’ UK equity income fund. This is based on its analysis of income funds over the past five calendar years, taking into account factors such as dividends, investment performance and the smoothness of returns.
Others on Sanlam’s ‘white list’ of top UK equity income funds include Axa Framlington Monthly Income, Royal London UK Equity Income and Threadneedle UK Equity Alpha Income. The analysis excludes UK equity income investment trusts, which, because of their ability to smooth the income they pay investors, have long-established records of increasing their dividends.
Williams says: ‘We are looking for income in parts of the market that are not that well researched. It enables us to dig out opportunities that others miss.
‘Yes, we are happy investing in FTSE100 stocks. Indeed, we would be fools if we did not. But there are lots of smaller firms out there that have strong balance sheets, have invested to make productivity gains and are now paying good dividends or have the potential to do so.’
Stobart Group, he says, is a case in point. Best known for its juggernauts, Williams says it has undergone a transformation in recent years. It is now the UK’s largest supplier of biomass fuels and it owns Southend Airport.
‘The airport has great potential,’ says Williams. ‘Passenger numbers are rising and it has a great reputation for service.’
Although Sanlam’s analysis puts the Miton fund top of the pile, its income record over the past five years is a little uneven, with the dividend payments dipping in 2013 before growing in each of the next three years. As a result, income seekers may prefer Diverse Income, an investment trust run by Williams and Turner in near identical fashion to Miton UK Multi Cap Income. There is 90 per cent overlap between the two portfolios.
The trust’s ability to regulate the income it pays out means that dividends have increased year on year since its launch in April 2011. It also has a year’s income in reserve to boost dividend payments if the economic backdrop tightens, forcing companies to cut back on the income they pay shareholders.