The UK equity income sector has struggled to shine over the past year or so, despite a strong UK stockmarket. The sector suffered during the banking crisis when a historically lucrative source of dividends dried up. The subsequent economic recession then resulted in more companies cutting dividends.
With the benefit of hindsight, February 2007 was perhaps not the best date for Standard Life to launch its UK equity income unconstrained fund. After a reasonably good start, the fund struggled during the financial crisis and was among the poorest performing in the sector. On January 1, 2009, Thomas Moore took over the management of the fund. He was not and still isn’t – arguably unjustifiably – a well known manager and turning round a poor-performing fund from a major group such as Standard Life was quite a challenge. Yet Mr Moore has risen to the occasion. Under his stewardship the fund has recovered some of its losses, although it still remains around 15 per cent below the initial offer price.
Mr Moore was quick to realise that while many stocks in the portfolio had been unsuitable for the financial crisis, they had the potential to perform well in the recovery he believed to be on the way. It was a brave decision to remain weighted in many stocks that had under-performed during the crisis but what a shrewd decision it turned out to be. During his tenure the fund has grown 80.5 per cent, compared to a sector average of 42 per cent.
Given the previous performance of the fund, it is hardly surprising to see it is only around £24m in size. However, this could be a tremendous advantage.
Many better-known funds in the sector are extremely large. It is almost a necessity for them to have significant holdings in the top 20 dividend-paying companies, which account for three-quarters of total UK dividends paid. There is nothing wrong with this. Mr Moore’s biggest holding is HSBC, a share both he and Standard Life have great confidence in. It could be argued that targeting bigger companies should not have worked well for the past couple of years though, as small and medium-sized companies stole the limelight. Mr Moore has fewer liquidity constraints with his smaller, more nimble fund and has been able to capitalise on this trend. The fund has 41.5 per cent in FTSE 100 companies, 40 per cent in mid caps and around 14 per cent in smaller companies. This means he can search the entire UK stockmarket for companies with the strongest dividend growth potential.
Mr Moore is keen to stabilise the fund’s income, which saw a 49.5 per cent increase in 2008, followed by a decline of 24.5 per cent in 2009 and a 7.5 per cent increase in 2010. The fund is currently on a forward yield of 3.5 per cent, probably around 1 per cent below many other UK income funds. However, should Mr Moore identify the right stocks, the fund has potential to show strong dividend growth over the coming years.
I have met Mr Moore on three occasions and am always impressed with his enthusiasm, keenness and hard work. It could be said that Standard Life is taking a risk with a relatively inexperienced fund manager but, given the robust team process, I am not overly concerned. The fund is not on Hargreaves Lansdown’s list of most favoured funds but we are monitoring it closely. It will be interesting to see how it copes if the bigger blue chips begin to perform better. This will be a challenge for Mr Moore, who is underweight in this area.
I have high hopes for Mr Moore and the SLI UK equity income unconstrained fund. We are in need of new blood in a sector that is not only vital for many people but which will become increasingly important as the baby-boomers start to retire and look not just for capital growth but also a rising income.
Mark Dampier is head of research at Hargreaves Lansdown