The fund, which will be capped at £250m, will apply the principles of UK equity income investing in UK small caps, targeting a 4.2 per cent yield. It will mirror Chelverton’s existing small companies dividend trust, which was launched in 1999.
Chelverton says the fact that smaller companies are under-researched relative to larger companies makes this part of the market inefficient in price terms, which presents good investment opportunities. It says most managers buy small caps for growth but dividends from smaller companies can be an essential part of a total return.
Fund managers David Horner and David Taylor will initially screen a universe of 125 companies for stocks yielding at least 50 per cent more than the market average excluding the FTSE 100 index. They will focus on stocks with a 4 per cent yield on a 12-month view and will look for pricing anomalies on a weekly basis.
The portfolio will favour companies with steadily growing dividends and sustainable business models. Recovery stocks may also be considered and the managers will prioritise medium term cash flow over short term trading when assessing dividend growth prospects.
Horner founded Chelverton in 1997 after four years at Strand Partners. He has also worked for Touche Ross & Co and 3i Corporate Finance. Taylor, a former head of UK smaller companies at HSBC Asset Managers, joined Chelverton in January and has over 22 years’ experience of small cap investing.
The new fund will have a low turnover of stocks at about 20-30 per cent a year. The managers will sell stocks when the yield falls below 2.5 per cent as a result of a re-rating or a change in its prospects for dividend growth. Chelverton believes this strategy will prevent the managers from clinging onto their favourite stocks when it would be more sensible to sell.
The fund’s UK focus means the fund is more reflective of the UK economy than larger companies that are subject to international influences. Chelverton’s stocks are also more likely to be acquisition targets, which should see prices rise relative to the acquirers, which usually fall in price upon news of a takeover.