It’s a quintessentially British trait to love an underdog and in recent days it has been the success of Leicester City Football Club in winning the Premier League that has captivated the nation and prompted a wave of admiration. The plucky club has emerged triumphant this season over enormously wealthy super clubs such as Arsenal, Chelsea, Liverpool, Manchester United and Manchester City, each of which have become global brands and are estimated to be in the top ten wealthiest football clubs on the planet.
In the world of investment funds it is no different, with the IA UK Equity Income sector, widely regarded as the “premier division” of stock market investment funds, dominated by some Big Beasts in the shape of Woodford Equity Income (£8.72 bn), Artemis Income (£6.58 bn) and Threadneedle UK Equity Income (£3.22 bn), which combined account for 34% of total assets in a £55 billion sector comprising 84 funds. While these funds are each managed by talented player-managers who have delivered great long term returns for their loyal fan clubs, we have gone in search for the sector’s equivalents of ‘Leicester City’, smaller funds from lesser known houses that may not have big marketing budgets or be household names but whose performance numbers have nevertheless been impressive.
Three underdog challengers that could take the premiership title from the Big Beasts of the UK Equity Income sector:
- Ardevora UK Income
Ardevora is a small fund management boutique founded by former Liontrust fund managers Jeremy Lang and William Pattinson in 2010. Their investment approach draws heavily on psychology in the search for stocks to own and identifying those to avoid. They argue that company management teams are prone to excessive ego-driven risk taking, so unusually they don’t meet company managers in person and focus instead on analysis of balance sheets and cash flow statements, avoiding stocks where management team behaviour looks risky and shows signs of hubris. They also think shareholders tend to overreact to short term news, so look for companies which may be subject to high levels of anxiety which have pushed their valuations too low. Another bias they focus on is the over-confidence of investment analysts in their ability to forecast accurately, which can mean they are slow to recognise when they have got things wrong, so the Ardevora team looks for growth companies with the capacity to positively surprise. The Ardevora UK Income fund pursues a fairly concentrated approach, currently holding just 39 shares in large and mid-sized companies. At £214 million it remains a relative minnow.
- Evenlode Income
The Evenlode Income fund, like the sector behemoth Woodford Equity Income fund, is managed from leafy Oxfordshire rather than the City of London. The fund is run from Chipping Norton by Hugh Yarrow, a former fund manager at Rathbones, and Ben Peters under the auspices of Wise Investments, a firm founded by Hugh’s father Tony Yarrow in 1992. The approach of the fund is to invest in a concentrated portfolio of around 30 “cash compounders”, quality businesses that are able to generate high returns on capital and with strong free cash-flow, without the need for debt. These are typically large and mid-sized UK-listed companies, that currently include the likes of Unilever, Diageo and GlaxoSmithKline. Although the fund invests at least 80% in UK-listed companies, it also includes some US holdings such as Microsoft, Procter & Gamble and Johnson & Johnson. This £399 million fund has been a very consistent performer, beating the FTSE All Share Index in each of the last five years on the trot.
- Unicorn UK Income
Unicorn Asset Management is a small boutique, focused exclusively on UK equities and with a particularly strong pedigree in smaller company investment. While most UK equity income funds invest primarily in larger companies, the Unicorn UK Income fund is biased primarily towards smaller companies, but also has mid-cap exposure, so can help diversify an existing portfolio of more traditional large-cap skewed UK equity income funds. The £689 million fund, which is managed by Fraser Mackersie and Simon Moon, invests in a portfolio of 50 companies picked from a universe that has been screened across a range of criteria. Top holdings include BBA Aviation, which provides refuelling and ground handling services to private, business and commercial aircrafts at locations across the globe; brewer and pub operator Marston’s, the world’s largest brewer of cask ale and Secure Trust Bank. In our view a fund like this will have natural capacity constraints because of the smaller companies focus, so this is the sort of fund we expect will one day ‘soft close’ to new investors.