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JO Hambro UK Equity Income - A tried and tested contrarian approach

Dominic Rowles | Tue 18 April 2017

Investments can go down as well as up so there is always a danger that you could get back less than you invest. Nothing here is personalised advice, if unsure you should seek advice.
  • Clive Beagles and James Lowen seek undervalued companies that have been overlooked by other investors
  • Performance last year was driven by exposure to the oil & gas and banking sectors
  • The fund retains its place on the Wealth 150 list of our favourite funds in the major sectors

Our View

The UK Equity Income sector is home to a number of excellent fund managers. Clive Beagles and James Lowen, managers of the JO Hambro UK Equity Income fund, are two of our favourites.

The managers’ contrarian style epitomises the “buy low, sell high” investment approach. A company’s dividend yield is inversely related to its share price - a falling share price leads to a higher yield assuming the dividend remains the same. Investing in companies when the dividend yield is high (and the share price is low) means the managers seek opportunities in some of the most undervalued areas of the stock market. Once the share price rises (and the yield falls), they can take profits and reinvest the proceeds into the next high-yielding opportunity.

Our analysis shows the managers’ disciplined approach has added significant value for investors over the long term, although this is not a guarantee of future performance. The fund currently yields 4.31% although yields are variable and not a reliable indicator of future returns.

The fund’s focus on more economically-sensitive companies that have been overlooked by other investors, along with its bias towards medium-sized and higher-risk smaller companies, means it could blend well with other funds focused on larger companies and more defensive areas of the market. We continue to rate the managers highly and the fund features on the Wealth 150 list of our favourite funds in the major sectors.

Performance

The managers have a long history of outperforming the broader UK market and over the past ten years the fund has returned 105.6%* compared with 73.7% for the FTSE All-Share index, although this is not a guide to how the fund will perform in future.

Annual percentage growth
Mar 12 -
Mar 13
Mar 13 -
Mar 14
Mar 14 -
Mar 15
Mar 15 -
Mar 16
Mar 16 -
Mar 17
JOHCM UK Equity Income 24.9 15.8 6.8 -7.2 23.8
FTSE All-Share 16.8 8.8 6.6 -3.9 22

Past performance is not a guide to future returns. Source: *Lipper IM to 31/03/2017

Following a difficult year, the fund has performed well since mid-2016 as a focus on previously unloved sectors, including financials and oil & gas, returned to investors’ favour. Exposure to commodity-related sectors, including investments in Rio Tinto and BP, boosted performance significantly.

Exposure to the telecommunications sector also contributed positively towards performance, while electronic component distributor Premier Farnell performed well after receiving a successful takeover approach from Swiss electro-mechanical engineer Daetwyler.

Where are the managers finding value?

Financials

Banks performed poorly for several years in the aftermath of the 2008 financial crisis and have since been held back by a number of regulatory setbacks. The Payment Protection Insurance (PPI) mis-selling scandal held back the banking industry, but there is some evidence the flow of PPI claims is slowing. Once the saga draws to a close, the banks should have more cash to increase dividends and reinvest for future growth. Any future interest rate rise could also boost profitability as banks could earn more on cash deposits and charge more interest on loans and mortgages to their customers. Current investments include Barclays, which the managers feel will also benefit from the appointment of a new Chief Executive Officer and experienced senior management team.

Energy

Companies in the oil & gas industry have struggled for several years due to tumbling commodity prices. The share prices of many companies in the sector have recovered over the past year against a backdrop of improving commodity prices and significant cost cutting, although the managers believe value remains on offer and prices have further to rise. Over 9% of the fund is currently invested in oil industry behemoth Royal Dutch Shell.

Smaller companies

The fund invests in companies of all sizes, although the managers currently see more value in smaller companies than ever before and have increased exposure accordingly. In contrast, exposure to medium-sized companies has reduced as they believe there is less value on offer in this area of the market.

U & I, a small UK-focussed property regeneration company, is currently held in the fund. The managers believe the company’s shares are undervalued compared with its longer-term growth prospects. The company has recently been refreshed with a new and experienced management team, which could help boost long-term performance.

Please note charges can be taken from capital which can increase the yield but reduces the potential for capital growth.

Find out more about this fund including how to invest

Please read the key features/key investor information document in addition to the information above.

Important information - Please remember the value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. This article is provided to help you make your own investment decisions, it is not advice. If you are unsure of the suitability of an investment for your circumstances please seek advice. No news or research item is a personal recommendation to deal.


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