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JO Hambro UK Equity Income Fund research update

Richard Troue | Wed 18 March 2015

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.

The yield of a stock is inversely related to its price; as price goes up, yield comes down, and vice versa. James Lowen and Clive Beagles, managers of the JO Hambro UK Equity Income Fund, exclusively invest in companies with a yield above the FTSE All-Share average. They will invest in companies of all sizes including higher-risk smaller companies. Buying where prices are depressed often leads the managers to take a contrarian approach, investing in unfashionable areas of the market.

To date this approach has proved successful. Since launch in November 2004, the fund has returned 184%, compared with 115% from the average fund in the IA UK Equity Income sector, and 127% from the FTSE All-Share Index. Please remember past performance is not a guide to future returns*. However the fund's focus on unpopular areas can lead to periods of underperformance, which was the case in 2014.

Annual percentage growth
Mar 10 -
Mar 11
Mar 11 -
Mar 12
Mar 12 -
Mar 13
Mar 13 -
Mar 14
Mar 14 -
Mar 15
JO Hambro UK Equity Income 20.54% 0.94% 23.56% 19.91% 5.41%
IA UK Equity Income 15.47% 2.03% 14.88% 16.87% 7.73%
FTSE All-Share TR 14.83% 3.42% 13.26% 11.20% 7.15%

Past performance is not a guide to future returns. Source: Lipper IM. *Figures to 2/03/2015.

BP and Shell represent almost 12% of the fund and their lacklustre performance was a drag last year. Lower oil prices put pressure on these companies' share prices, but the managers are happy to keep holding them. They believe BP will remain profitable despite the lower oil price, having cut costs in the aftermath of the 2010 Gulf of Mexico oil spill. Historically, the share prices of BP and Shell have correlated less with the oil price than many other producers, easing the managers' concerns.

Food retailers were another cause of weakness in 2014. Tesco's well-publicised accounting scandals caused the share price to tumble, and the holding was sold in September. Sainsbury's share price also fell, struggling to contend with strong competition from Aldi and Lidl. The managers believe the problems are overstated. Lower oil prices and increased consumer spending should benefit all supermarkets, and they continue to hold Sainsbury's.

Mining is perhaps the most unfashionable sector at the moment. It has struggled for a number of years, and many investors now avoid the sector. This is perfect for James Lowen and Clive Beagles. In their view, larger companies are set to benefit from cost-cutting initiatives and new shareholder-oriented management, whilst low commodity prices have driven out many smaller competitors. With share prices depressed, yields look attractive. Glencore was added in June 2014 and Rio Tinto topped up.

The fund successfully increased its dividend by 14% last year. This was partly due to the merger of TUI AG and TUI Travel, which resulted in the payment of an additional dividend in 2014. Over the past five years the managers have achieved annual dividend growth of over 10%. They are forecasting 2-4% growth in 2015 although please remember dividends are variable and not guaranteed. The fund currently yields a generous 4.2%.

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Our view on this fund

The IA UK Equity Income sector is home to many excellent managers; James Lowen and Clive Beagles are two of our favourites. Their contrarian style has many advantages, but it can lead to periods of underperformance in the short term. Investors should regard this as part and parcel of long-term investing and we remain confident in the ability of these managers to deliver good returns over longer periods. The fund remains part of the Wealth 150 list of our favourite funds across the major sectors.

Please note the fund carries a performance fee, details of which can be found in the fund's key investor information document. The fund's charges can also be taken from capital, which can increase the yield but reduce 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.

The value of investments can go down as well as up, this means you could get back less than you invested. Therefore all investments should be regarded with a long term view. No news or research item is a personal recommendation to deal. If you are unsure about the suitability of an investment please contact us for advice.
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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