UK Equity Income Fund

Key points

• The investment objective of the fund is to seek to generate an absolute return in all market conditions through exposure primarily to UK securities
• Investment management responsibility for the fund is with Loudwater Investment Partners Limited since 1 December 2009
• Sector: IMA UK Equity Income

Current views

January was the new management’s second month managing the fund. In December, 67% of the fund was allocated across 35 stocks, leaving a healthy cash position. This view was based on the belief that many equities valuations had perhaps risen too high. This proved prudent when a selloff in equities saw the FTSE 100 drop by 5.7% during January*. The fund was not immune to this retracement in valuations, but the largely defensive portfolio held up well. Moreover, with a dividend yield in excess of 4.5% the fund was ahead of that of the FTSE 100.

The first market commentary outlined the management team’s current stock-picking themes — specifically a focus on asset management companies and utilities — and its emphasis on dividend yields. January provided ready evidence of the team’s buy and sell disciplines.

We maintained positions in 34 of the 35 stocks bought at the start of December. We are firm advocates of the old adage that value should determine price, not the other way around. We believe that holdings which have been researched at great length, where we have identified good business models with solid defensive moats, and fundamentally understand, will ultimately deliver income and capital growth. They should not be sold off at the whim of the market.

Equally, however, we are not afraid to admit mistakes, and to reverse course on a stock if we no longer understand the company or if the proverbial moat has been breached. For example, we sold Man Group in January. This was not in direct response to the drop in its share price, but to the apparent struggles of logarithmic trading (the strategy behind Man Group’s flagship AHL fund) that both Man Group and its competitors are facing. With very little way of knowing if this blip is due to volatile markets or to something more fundamental, we decided to sell the holding. Our decision to sell at £2.79 was a small solace, as the share price subsequently fell to £2.40.

We replaced Man Group with a holding in Brewin Dolphin, which fits neatly into our portfolio. First, it has a forecast dividend yield of over 5% and a forecast dividend cover of 1.6x. Second, a major theme of our portfolio is that low rates of interest on bank deposits and a rising savings rate will lead to fund flows into asset managers and equity purchases, both of which should benefit an investor in Brewin Dolphin.

Brewin Dolphin’s trading update of 28 January 2010 was encouraging. It stated income for the first quarter to 25 December 2009 at £56.9m, 11.5% higher than the same period last year (that of 28 December 2008 stated £51m). We remain optimistic that this trend will be mirrored amongst its peers in the portfolio.

* Source: Bloomberg, 01.01.2010 – 29.01.2010