The latest fund tip, hand-picked by our Investment Guidance team.
Fund of the Month May 2020
With Shell and a number of other FTSE 100 stalwarts cutting their dividends, UK income investors have been left wanting. It may, therefore, be important to look for a strategy without significant weightings in these stocks, one which considers the potential equity income stars of the future.
Reasons to buy
- Despite its short track record the fund has already proven itself in both rising and falling markets, delivering market-beating returns.
- The differentiated approach allows the fund to look across the entire UK equity market, rather than being concentrated in high-yielding names.
- Managed by a large and experienced team who are uniquely positioned to benefit from the insights of other Octopus products.
- Seed ongoing charge figure (OCF) of 0.45% makes it the cheapest actively managed fund in the sector.
Things to be wary of
- The fund is small and doesn’t have a long track record; however this allows it to be nimble – taking advantage of compelling opportunities.
- A reasonable amount of the portfolio is held in smaller companies, which can be subject to higher levels of share price volatility.
- The fund’s yield, although respectable, is currently at the lower end of the sector - so for investors chasing very high yields it may not appeal.
About the fund
The fund was launched in late 2018 and is currently run by the trio of Chris McVey, Richard Power and Dominic Weller. Their aim is to provide predictable, attractive dividends coupled with long-term capital growth by investing in a blend of companies from across the entire UK equity market. The managers are supported by a large, experienced team and are uniquely positioned to benefit from the ideas stemming from other Octopus products. Companies coming into the fund have likely been held at VCT and micro-cap levels, so their business models and prospects are well understood.
The core-satellite approach used is differentiated from a large proportion of the IA Equity Income sector. It involves the bulk of the portfolio comprising of proven winners who are able to grow earnings and dividends ahead of the market, while a smaller part of the portfolio is dedicated to companies with superior sustainable dividends or high earnings growth. Alongside in-house quantitative screening, management meetings and site visits form a vital part of the process.
Portfolio performance and positioning
The portfolio gives exposure to an array of sectors with Media, Support Services and Household Goods & Home Construction being notable in terms of their weighting. There are currently 59 holdings in the fund, with almost a third of these being under £250m in size. The portfolio typically has around 75-80% invested in the ‘proven winners’ core part of the portfolio, and 20-25% across those with scope for upside in terms of dividends or growth – giving the portfolio a nice balance.
Despite its short track record the fund has already proven itself in both rising and falling markets. In 2019 the fund produced returns in excess of 34%, comfortably outperforming the sector and FTSE All Share benchmark. Year-to-date the fund is also ahead, again by some margin. This illustrates the fund’s potential to grow capital in rising markets but also to provide a level of capital protection when markets sell-off. Further reinforcement for this is found in the level of risk used since inception, which is one of the lowest in the sector – meaning risk-adjusted returns are unrivalled.
As always, past performance can’t be used as a reliable indicator for future performance. However, the fund does have a solid and differentiated investment process delivered by experienced management. At the end of March the fund was offering a 4.4% yield with an ongoing charge of 0.45% for its seed share class, making it the cheapest actively managed fund in the sector.
All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.