Adrian Frost on the EU referendum, UK dividends and the Artemis Income Fund

Heather Ferguson | Wed 08 June 2016

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• Adrian Frost expects the UK to vote to remain in Europe in the upcoming EU referendum
• Recent dividend growth has been muted but he expects greater dividend growth over the next few years
• Companies in the UK will struggle to grow over the coming year

Adrian Frost's view on the EU referendum

Adrian Frost expects the UK to vote to stay in the European Union. The fund's investments in domestically-focused medium-sized companies could perform relatively well in the short term if the UK votes to stay, while larger companies (where the bulk of the portfolio is invested) would benefit from sterling weakness in the event of Brexit. However, the manager feels the impact of the vote will be short-lived and has not made any material changes to the portfolio in anticipation of the decision. That said, he has taken advantage of the volatility to buy more of what he likes and sell investments he no longer favours.

Income

UK companies could struggle to grow over the next year, and the introduction of the National Living Wage could have a detrimental effect on those focused on the domestic economy. Dividends from some of the largest companies in the UK are also under pressure. Oil & gas and mining companies have suffered from a significant fall in commodity prices and although prices have recovered since February this year, they are yet to reach previous highs. The fund's investments in tobacco and utility companies are also struggling - Imperial Tobacco, Drax, and Centrica face increased regulation and government intervention.

Over the past year, Adrian Frost has reduced exposure to companies with uncertain dividends. He has focused his attention on identifying more secure sources of income and has identified a number of opportunities among banks, insurance and life companies. Current investments include Lloyds, which the manager expects to benefit from normalising interest rates and SAGA, which has its own source of demand (an ageing population) so earnings are less affected by the wider global economy.

A preference for security means he often has to accept lower yields than he would ordinarily like and as a result, the fund's recent dividend growth has been muted. However, the manager feels his prudence will be rewarded; companies that are cautious with their balance sheets during this period of uncertainty should be in a position to offer greater dividend growth in the future.

The fund's longer term dividend record remains good. Against a backdrop of lower interest rates and widespread dividend cuts many managers are finding it difficult to grow their funds income. We feel the fund's current yield of 3.87% is attractive, although all income is variable and not guaranteed.

Performance

The fund underperformed its benchmark since the beginning of December 2015, following several years of strong returns. A low exposure to commodity-related companies boosted performance in the latter half of last year, but held back more recent returns as commodity prices rebounded from February.

Long-term performance remains strong. Adrian Frost's focus on cash-generative companies, which have the ability to reliably increase dividends over time, has served the fund well so far. Over his tenure the fund has risen 196.8% compared with 120.9% for the FTSE All Share Index and 127.2%* for the IA UK Equity Income sector.

Performance of the Artemis Income Fund over the manager's tenure, including reinvested dividends

*Source: Lipper IM to 01/06/2016. Past performance is not a guide to future returns.

Our View

Equity income investing can form the backbone to a portfolio, either to provide an income or with dividends re-invested for growth. We rate Adrian Frost highly and believe he has the experience and skill to outperform over the long term. The fund remains on the Wealth 150 list of our favourite funds across the major sectors.

Please note the fund's charges can be taken from capital which can increase the yield but reduces the potential for capital growth.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.