Aim: Income by investing in UK smaller companies
Minimum investment: Lump sum £1,000
Investment split: 80-100% in UK smaller companies
Isa link: Yes
Pep transfers: Yes
Charges: Initial 5%, annual 1.5%
Special offer: Renewal commission increased to 0.65%
Offer period: Until December 1. 2006
Commission: Initial 3%, renewal 0.5%
Tel: 020 7222 8989
Smaller companies specialist Chelverton Asset Management is launching a UK equity income fund that will apply the principles of UK equity income investing to UK small caps, targeting a 4.2 per cent yield.
Looking at how the fund fits into the market Chase de Vere Financial Solutions research manager Justine Fearns says: “The Chelverton UK equity income fund is a high-yielding small cap fund sitting in the UK equity income sector. This makes it very different to its sector peers, which invest mainly in large caps, though some delve deeper into the mid-cap arena, such as the Rathbone income fund.”
She thinks that as Chelverton is exploring different ground to its peers, the fund could be bought alongside some of the well-known funds in the sector, as it would probably complement them.
“Chelverton argues that smaller companies have consistently provided higher returns than large companies over the longer term; a point argued by other smaller companies managers. It also believes that the smaller companies market is under researched and inefficient, which creates opportunity to exploit pricing inefficiencies. This all sounds very familiar but Chelverton then applies a yield discipline, which enables it to target a yield that is currently much higher than the equity income sector average,” says Fearns.
At the moment the yield is 4.2 per cent compared to the sector average of 3.2 per cent. “As the fund is largely based on Chelverton’s small companies dividend trust, which has a consistently strong and relatively high yield, we can hope that this level of yield will continue,” says Fearns.
According to Fearns, the fund’s uplift in yield may catch the attention of some investors as it could help diversify an income stream with its quarterly distribution. She points out that it should offer a high yield with a potentially bigger growth kicker than perhaps a large cap fund would.
“It does make you wonder why there are no other funds like it. After all there are a number of reputable investment houses that run both smaller company and equity income money. It can’t be that they just haven’t thought about it, maybe there is something in the risk profile that they don’t like. Who knows, only time and the performance of this fund will tell,” says Fearns.
Fearns shines the spotlight on the company behind the fund. “Chelverton Asset Management is a boutique in the truest sense, with an experienced team of five operating out of two locations, London and Bath. It specialises purely in managing smaller companies and Aim- listed stocks. In its small companies dividend trust, Chelverton focuses on stocks with a market cap no bigger than £500m. Currently it has £70m assets under management invested via three closed ended funds. Investors can rest assured knowing that the team knows how to run small cap money,” she says.
The team has set a £250m cap on this fund, which Fearns thinks is to be expected given the current size of the firm and the market in which it invests. “I would imagine that it will take a little while to reach but it shows that the managers are aware of their market and are working towards maintaining performance for investors,” she says.
Fearns notes that there is no formal literature yet available for the fund and that pre-marketing is being carried out verbally. “This should help Chelverton get it’s message across, perhaps better than on a sheet of paper, so shouldn’t hinder it greatly,” she says.
Casting an eye across the basic details of the fund, Fearns thinks the charges are standard for this type of investment, as is the £1,000 minimum lump sum investment amount.
Switching her attention to the potential drawbacks of the fund Fearns says: “It can be very easy to dismiss boutiques, particularly those that really are specialist, such as Chelverton. Often this is not because it’s a poor product or poor management but rather because the assets within the company or specific fund are insufficient for investor’s requirements. Assets under management of £70m is not a large amount, even if most is in smaller companies or Aim. This may put some investors off. “
Fearns also notes that the Chelverton team is small so questions could be raised as to how it would deal with things if the investment really takes off. “However, Chelverton has to a certain extent already dealt with this; outsourcing some of it’s business units, such as marketing and distribution to CIB Invest, and capping the fund at £250m,” she says.
Fearns also highlights the fact that the fund does not have an individual track record, although she says the performance of its smaller companies dividend trust could be used as an idea of what the performance will be like. “This again, will not fit with the requirements of investors who like to see a minimum track record,” she adds.
In terms of competition, Fearns says there are plenty of funds that invest in small caps. “If you drill down, many of these have a value tilt to them and will generally be investing in stocks with higher yields than most. However, most are managed on a total return basis so the emphasis is not on producing that all-important yield.
“Of the equity income funds, Rathbone’s is the main non large cap fund, investing predominantly in mid caps. The Chelverton fund is not really a comparable product at the moment. “
Summing up, Fearns says: “Within its sector, it is different – but equity income is a very competitive sector and the fund will have to do well to be bought alongside the usual suspects.
She concludes: “We don’t always need to see a three year performance record, nor do we necessarily always invest with funds of a specific size. While we’re very positive about what Chelverton aims to achieve with this fund, it has yet to achieve it within the Oeic wrapper and has yet to produce any client facing literature.”
Suitability to market: Average
Investment strategy: Average
Adviser remuneration: Average