Aim: Growth by investing in the 15 highest yielding stocks in the FTSE 100 index
Minimum investment: Lump sum £3,000
Investment split: 100% in UK companies
Isa link: Yes
Pep transfers: Yes
Charges: Initial 5%, annual 1.5%
Commission: Initial up to 3%, renewal 0.5%
Tel: 0207 661 8200
Arch Financial Planning managing director Arthur Child is not sure the name of the fund will do it any favours as it could be seen as a gimmick rather than a serious investment. “When I showed this to our support team they quickly fired back such comments as “it makes you paws for thought”, “you would be barking mad not to invest” and “are fund managers going to the dogs?” he says.
Childs believes it is logical to invest in the funds or stocks that are out of favour today in the hope that they will be in the first or second quartile in five year’s time. “Using a manager’s skill to look for value opportunities among unloved stocks is something which has been packaged successfully by many fund groups, most notably M&G in its recovery fund. However, the dogs of the FTSE fund uses a mechanical process based on yield to search for its value opportunities,” says Childs.
Childs notes that the theory behind the fund is that investors become too optimistic when prices are high and too pessimistic when they are low. “The fund aims to take advantage of investors’ emotional overreaction, using stocks which are drawn from a high quality blue chip population. The strategy involves investing into the 15 stocks with the highest prospective yields in the FTSE 100 Index. The portfolio is rebalanced quarterly, to align with changes in the index,” he says.
This approach reminds Childs of the process used about 20 years ago by Johnson Fry, which became Legg Mason. “This resulted in funds called Hy5 and Hy1 which were not altogether successful. However, the Johnson Fry model reduced the eventual fund choice to just five funds, or even one fund, unlike the 15 here.”
Henderson Rowe says that companies generally try to avoid reducing dividends, so those with high yields tend to be those whose prices have fallen and are usually out of favour. Childs says: “By concentrating only on the FTSE 100 it believes the process is safer for investors because the companies may be suffering excessive undervaluation, but are still likely to be long-term survivors.”
Childs notes that the fund manager reserves the right to overrule the process in certain instances, such as if he believes the downside risk to be unacceptable, or if there is a significant reduction in dividend between the quarterly rebalancing of the portfolio.
Childs points out that before the fund launch, Henderson Rowe had run this process for its clients, with around £10m under management, for over four years. “Including reinvested dividends it quotes a gain of 176 per cent against the FTSE 100’s total return of 78.6 per cent over the same period,” he says.
He thinks the fund should appeal to trustees who would otherwise want to hold a small portfolio of FTSE 100 stocks. “The automatic process and tax and administrative efficiency are attractive. For the same reasons this could be a good fund to hold in a Sipp or pension drawdown,” he says.
Childs thinks IFAs will draw comfort from the fact that Elite, the third party arm of Way Fund Managers, administers the fund. He says many IFAs will know as a highly innovative multi manager provider.
Considering the potential drawbacks of the fund Childs says: “The mechanical process causes me some concern. Throughout investment history people have sought to find a process that will ‘beat the market’. However, as far as I am aware, all such systems have eventually failed in the long term, if only because any successful process sows the seeds of its own destruction but appealing to more investors.”
He thinks the main competition will come from the M&G Recovery Fund that is showing an average annual return of over 16 per cent for the past 38 years. He also suggests equity income funds managed by Neil Woodford, Bill Mott, George Luckraft, Tony Knutt and Adrian Frost.
Childs concludes: “I am sure the logic of the fund is one with which the FSA will approve, given their insistence that past performance is not worthy of being taking into account when choosing an investment. This fund goes further and says that poor past performance in the right kind of stocks is a definite buy signal.”
Suitability to market: Good
Investment strategy: Good
Adviser remuneration: Average