ASI Income Focus: January 2021 fund update

Emma Wall | Thu 04 February 2021

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• The fund aims to pay a sustainable dividend through investing in quality stocks
• Aberdeen Standard took over management of the fund in January 2020
• The coronavirus pandemic has meant a challenging start for the co-managers
• This fund is not on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits into a portfolio

This fund aims to provide a high level of income together with capital growth through investing in quality UK stocks, though neither income nor growth is guaranteed. It is a high conviction fund, meaning it can have less than 40 holdings, adding risk. It could work within a portfolio invested for income, invested alongside global income funds, or bond funds.

Manager

The ASI Income Focus fund is run by Thomas Moore and Charles Luke. The co-managers have more than four decades of UK equity income experience between them. They also benefit from the support of the 16 strong UK equity team at Aberdeen Standard. All investment professionals at ASI can be both fund managers and company analysts, with sector-specific responsibilities and portfolios to run. Moore specialises in financial services while Luke analyses three sectors; business support services, gas & electricity and health equipment & services.

As well as their sector analysis responsibilities, the two managers run two other funds and two investment trusts between them. These additional portfolios are UK equity income mandates and therefore complimentary to ASI Income Focus. This is the only fund they co-manage together.

Aberdeen Standard took over the management of this fund in January 2020, having previously been run by Woodford Investment Management. It was reopened for trading on 12 February 2020.

Process

The co-managers run a concentrated portfolio of their best ideas, with a total return philosophy, meaning they aim to grow both capital and income. They look for quality companies, with decent cash flows, which they think they can buy at a fair share price. The smaller number of holdings can add risk as each company can have a bigger impact on the fund’s performance. The ability to use derivatives can also add risk.

The portfolio is made up of a blend of larger companies which the managers believe can pay a sustainable income and more economically sensitive names – this combination aims to deliver both income and capital growth, though neither are guaranteed. The managers do not like companies with too much debt.

They have more invested in UK domestic stocks than the broader market, which hurt through 2020 as the headwinds of Brexit and the pandemic impacted these stocks the most. Of their current 35 stocks, 10 holdings suspended their dividends in 2020, but the managers retain conviction the dividends will return. A few of these holdings have already reinstated dividends such as Close Brothers and Direct Line.

That said, they did sell out of positions they did not think would survive the pandemic, such as travel operator Tui, which they concluded did not have the right balance sheet to survive a year of no travel.

The managers have been active in the past year, and took advantage of the market volatility to add to Direct Line as they like its strong yield and balance sheet. Their investment in insurance company Hastings was bid for, so they looked for another insurer to gain exposure to the sector. The managers also bought mining company Rio Tinto as they consider it a quality company with a high yield. They recognise that it has ESG (Environment, Social and Governance) risks but think the company is making progress and ASI has engaged with the CEO to bring about positive change.

Culture

Aberdeen Asset Management and Standard Life merged in 2017, creating asset manager ASI. Since the merger there has been changes to both processes and management at the firm, with both former chief executives leaving. The UK equity investment teams seems settled and well established however, and we believe the co-managers of the ASI Income Focus fund work well together.

ASI is a firm well known for its commitment to ESG and, while the managers of Income Focus will own stocks which ethical funds would not, they say they want the companies they invest in to be considerate of the environment and the impact they have on it.

The managers see both an investment and engagement opportunity in those stocks which are out of favour because of poor ESG scores, leading to depressed prices and higher yields. They say they can have the most positive impact on those companies through engagement and make a difference.

Cost

This fund has an ongoing charge of 0.75%. HL clients benefit from a negotiated discount of 0.25% and so pay 0.50%. Part of the fund discount is achieved through a loyalty bonus, which could be subject to tax if held outside of an ISA or SIPP. The HL platform charge of up to 0.45% a year also applies.

Performance

The fund has been under the management of Luke and Moore for less than a year, which is not a sufficient time period on which to judge performance. The portfolio is currently more weighted towards value-style stocks, though the process is style agnostic. This bias has hurt performance recently, as many of the companies that have performed the best through 2020 are those that pay no yield, so the fund has lagged the wider market.

Past performance isn’t a guide to future returns. Source: Lipper IM to 31/12/2020.

Find out more about the ASI Income Focus, including charges

ASI Income Focus Key Investor Information