WHAT causes a highly rated equity income fund to slip from top to bottom in the performance tables? And should the manager dump his investment approach or stick with it?
Fans of Standard Life’s investment manager Thomas Moore – and this column has long been one of them – have been struck by a marked under-performance by two of the funds he looks after: the popular £1.2 billion Standard Life UK Equity Income Unconstrained fund and the £185 million UK Equity Income Investment Trust.
The first half of 2016 turned out to be extremely unhelpful for SLEIT
The unit trust has gone from a dazzling six-year outperformance against the FTSE All-Share Index to being the worst portfolio in its peer group over the year to date with a loss of 4.04 per cent against a rise in the total return FT All Share of 10.5 per cent.
The investment trust SLEIT has fared no better. While still showing a cumulative five year gain of 84.7 per cent – out-performing the 73.4 per cent posted by the UK equity income sector average – recent figures have shown a marked reversal of fortune. Over the past 12 months the share price has fallen by 7.5 per cent while the income trust sector average has gained 5.6 per cent.
Fund analysts like to divide the world into four blocks or quartiles depending on performance: Heaven is the top quartile, followed by Earth, Purgatory and Hell. Over the past year SLEIT has fallen from Heaven, crashed through Earth, barely stopped at Purgatory – and now resides in Hell.
Tom Moore was in Edinburgh last week to meet with leading investment trust analysts and wealth managers and I heard at first hand his explanation for the decline and how he has now positioned himself.
Two factors account for the trust’s under-performance. The first is not difficult to fathom. The clue is in the name: “UK Equity Income”: “We were”, he admits, “too heavily invested in domestics”. As a result the trust missed out on the dramatic de-rating of UK stocks compared with dollar earners over the past year.
The second was the trust’s relatively over-weight position in mid and small capitalisation stocks. This, in normal circumstances, is no crime and indeed a virtue. But in the “new abnormal” that has come to prevail over the equity market this year, SLEIT was caught out.
“The first half of 2016”, says Moore, “turned out to be extremely unhelpful for SLEIT’s positioning – a sharp rotation away from financials (due to falling bond yields) and UK domestic mid and small-cap stocks (due to Brexit) and into resources (due to the falling dollar) and consumer staples (due to falling bond yields).”
Because of its portfolio posture, that immediate post-Brexit kneejerk fall in markets hit SLEIT particularly hard, with a scramble out of shares in companies perceived to be vulnerable to the consequences of the vote outcome.
But now a more considered reaction has set in. “Share prices”, he adds, “have been driven by swings in investor positioning and macro uncertainty, rather than underlying corporate fundamentals.” Moore points to recent company commentary that has been solidly upbeat – including companies as diverse as BT, Bovis, Ibstock, Virgin Money and DFS. Gloomy Treasury and Bank of England cosmologists have much to answer for if these prove anywhere near right.
Currently the trust has an allocation of just over 42 per cent to companies in the mid-cap FTSE 250 sector (which accounts for 15.5 per cent in the FTSE All-Share Index) and 12.7 per cent in smaller companies (which account for just 3.3 per cent in the All-Share. There is still a hefty 45.2 per cent allocation to companies in the FTSE 100 against their 81.2 per cent representation in the FTSE All-Share.
A striking section of his presentation was given over to the attractions of sustainable yield over high yield. There was also a timely reminder of the vulnerability of high yielders in the FTSE 100 – companies considered safe havens for income investors. Among the giants to have cut their dividends since 2014 are Tesco, Sainsbury’s, Morrisons, Centrica, Barclays and a clutch of mining giants including Anglo American and Rio Tinto.
So after “a tricky year”, Moore is sticking to his guns, citing the recovery in recent weeks as evidence that his policy of sticking with fundamentals and that his commitment to dividend sustainability and growth will see the trust back to long term winning form.
Shares in SLEIT currently stand at 409.25p, on a discount to net assets of 4.88 per cent and a yield of 3.69 per cent. For the record it has increased its dividend pay-out every year since its launch in 1992 – a cumulative rise of 326 per cent.