JO Hambro UK Equity Income - a proper equity income fund

Richard Troue | Fri 05 January 2018

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• Clive Beagles and James Lowen continue to tilt the fund towards domestically-focused companies
• Out-of-favour areas such as banks, financial services, construction, mining, and oil companies feature heavily
• The managers are positive in their outlook for dividend growth in 2018, but there are no guarantees

Our View

This is a true equity income fund. By this I mean Clive Beagles and James Lowen, the managers, look for high-yielding companies, often in unloved sectors, and hold them for the long term. The aim is to benefit from the attractive, hopefully growing, dividends the companies pay, as well as rising share prices as they return to favour. Then they move on to the next unloved opportunity.

It’s a proven investment approach and the managers’ discipline in sticking to it has resulted in excellent performance, including good dividend growth, for long-term investors. The focus on unloved areas means the fund will naturally go through periods of weaker performance, and there are no guarantees past success will be repeated.

For investors who seek a high and rising income from the stock market, plus the potential to grow their capital over the long term, this remains one of our favourite UK equity income funds. It features on the Wealth 150 and currently yields 4.3%, although this is variable and not a reliable indication of future income.

Portfolio positioning

During 2017 Clive Beagles and James Lowen gradually invested more of the fund in domestically-focused companies. The share prices and valuations of many UK businesses have been depressed as investors worry about the UK’s prospects post-Brexit. The managers remain more positive than most though, believing it is in both parties interests to strike a Brexit deal. They also expect economic growth to be better than predicted.

On this basis they are happy to hold some retail companies in the portfolio. Kingfisher, the owner of B&Q and Screwfix, was added to the fund in late 2017, while existing investments in Halfords and DFS were also added to.

Housing and construction-related companies also feature in the fund. November 2017’s Budget was widely considered to be positive for the sector as the Government continued with its attempts to encourage more first-time buyers onto the property ladder. As well as investments in housebuilders such as Bovis Homes, there is exposure to the sector via brickmakers Ibstock and Forterra; and construction services firm Morgan Sindall.

In contrast, there is relatively little exposure to consumer staples, pharmaceutical, tobacco and utilities companies. As investors have flocked to these companies in recent years, favouring their stable earnings and dividends, valuations have been driven to unattractive levels, according to the managers. Please note the fund also invests in higher-risk smaller companies.

Performance summary

Performance has been strong over the past year. The fund has grown by 17.7% compared with 13.1% for the FTSE All Share Index and 11.3% for the IA UK Equity Income Sector*. Towards the end of the year investments in BP and Royal Dutch Shell contributed positively to performance as they continued to make progress controlling costs and improving cash flow. Vodafone and Bloomsbury, the publishing company, also performed well after releasing good results, while many of the fund’s domestic investments fared well in December following the announcement that we are to move on to the second phase of Brexit negotiations.

Long-term performance has been excellent, with the fund outperforming the broad UK stock market and peers in the IA UK Equity Income Sector. Dividend growth has also been impressive, although there are no guarantees this will continue as past performance is not a guide to the future.

JO Hambro UK Equity Income - performance since launch

Past performance is not a guide to the future. Source: Lipper IM to *31/12/2017

The managers have seen good dividend growth from their underlying companies in 2017 and they believe a number of their companies are well placed to continue growing dividends in 2018.

While the fund is not devoid of exposure to global businesses, it is tilted to benefit from better than expected growth in the UK economy and UK-focused companies, so is likely to perform better if the managers’ view is correct. Over the long-term they have proved successful at combining their analysis of the economy and individual companies to rotate between unloved areas. We believe this approach will continue to deliver good performance for long-term investors.

Please note that this fund has the ability to apply a performance fee. 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.