Fund in Focus: Timing may not have been ideal but divi-based trust is working

Published on Friday 10 October 2008 14:00

ROB Davies knows that launching his Munro Fund in October last year was not the best piece of timing. A tricky start, battling with launch costs and fees, preceded a series of volatile periods in the markets and, now, a widespread lack of confidence among investors.

"It's been a brutal environment and we have done very little trading. But the fund has delivered reasonable returns in all this volatility."

The fund, described as a fundamental tracker, is the only one of its kind in the UK.

Davies said the aim is not to "shoot the lights out, but to deliver asset class returns on UK equities. There's no clever strategy and it's not about skills or a lack of them. It's about a systematic process".

For each FTSE 350 stock – except investment trusts and companies that don't pay dividends, such as EasyJet – Davies and team calculate the forecast gross cash dividend, using the consensus forecasts produced by analysts.

Each company's contribution to the total gross cash dividend forecast is used to determine its weighting, with HSBC currently the biggest holding. This is where the fund differs from traditional trackers, in which the weightings are determined by share prices and market capitalisation. The process is repeated each month, so it accounts for changes such as new share issues and forecasts.

"There are lots of mechanics and lots of spreadsheet work but it is very transparent and simple," said Davies. "And because we're using other analyst data, the overheads are low."

The focus on dividends is the fund's main selling point, as the investment is dictated by where dividends are being produced. The flipside of this, however, is that it may not benefit so much from growth (as opposed to income) stocks when those shares are doing particularly well. But the difficulty at the moment is as much about convincing people to invest in markets.

"There are a lot of positive factors but the real issue is sentiment and everyone is sitting on their hands," said Davies. "If you look at the long-term, the UK stock market is as good a place to be as anywhere. The biggest companies are those like BP, Shell, Vodafone and Tesco, which are still making money."

One frequent investor error is to mistake the UK stock market as representing the UK economy, added Davies. "

There is no initial charge and the annual management charge is 0.75 per cent. For more information, visit www.themunrofund.com or call 0141 931 7646.