Aviva Investors UK Listed Equity Income: September 2020 fund update

• This fund is run by co-managers with considerable experience picking income stocks
• The fund managers have used recent market volatility to invest in quality companies
• The fund invests more in financials and industrial stocks than the benchmark
• This fund is on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits into a portfolio

The fund managers look for companies which are market leaders with a competitive advantage and have predictable cash flow. The emphasis on dividends and dividend growth makes this a more conventional UK equity income fund. It could help form the foundation of an income portfolio, to be held alongside bond funds, or a global equity income fund. This is a concentrated fund, so each holding can have a significant impact on performance, both positively and negatively, and can increase risk.

Manager

Chris Murphy has managed the fund since April 2009, and was joined by co-manager James Balfour in June 2016. They are supported by a team of eight, with more than 100 years combined investment experience, led by chief investment officer for equities David Cumming. Between them the Aviva UK equities team runs funds totalling more than £13 billion.

The two co-managers have sector specialisms to support the wider team’s idea generation, but we think these additional analyst responsibilities are complimentary to their fund management role.

Process

The managers target an income of more than the FTSE All Share benchmark, alongside capital growth over the long term. They do this through investing in stocks they believe have a sustainable competitive advantage over peers, with the potential to pay high dividends. The managers look to construct the portfolio from 40-75 stocks, in a way that provides consistent returns, although no performance is guaranteed.

In order to target this consistency, they look for companies with predictable, stable future cash flow that will deliver capital growth and income through the market cycle. The fund blends those able to offer a high yield now with others capable of strong dividend growth, although yield is not guaranteed.

The managers have been taking advantage of this year’s increased market volatility to add to certain positions in the portfolio, and buy into new opportunities. Trades include topping up investments in financial firms Intermediate Capital, Schroders and Legal & General which the managers consider to have strong balance sheets and recurring revenues.

They used market weakness to buy packaging company Smurfit Kappa, builders’ merchants business Grafton Group and plastic piping manufacturer Polypipe Group. The managers say these are quality businesses which they believe are undervalued.

The fund currently invests more in financials and industrial stocks compared to the FTSE All Share benchmark, making up 36% and 32% of the portfolio respectively. The managers say this is where they see the strongest stock ideas. The fund is underweight basic materials and oil & gas compared to the benchmark.

Culture

The fund managers are rewarded for one and three year performance, and bonuses are paid out over a period of time, which encourages a long-term commitment to both unit holders and the parent company. Managers are rewarded in Aviva shares as well as cash, which we like as again it signals a commitment to the firm which is positive for investors.

ESG analysis is integrated into stock selection, with environmental, social and governance considerations being included in every stock research note. Aviva have a team of ESG analysts which the managers can utilise, who provide data and information but also lead engagement with companies and clients. Ideally this process would be adopted by the sector analysts and portfolio managers themselves, rather than by a separate team, but it shows a positive corporate commitment.

Cost

The annual fund management charge is 0.81%, with a saving of 0.32% for HL clients. This brings the ongoing charge down to 0.49%. The saving is achieved through a loyalty bonus which may be taxable if the fund is held outside of an ISA or SIPP. The HL platform charge of up to 0.45% a year also applies.

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

Performance

The fund has outperformed the FTSE All Share since Chris Murphy took over in May 2009*. On average the fund has performed in line with a rising market, but also fallen less than a negative market, which is in line with the fund managers’ aim for consistent returns. Past performance is not a guide to the future however, so there are no guarantees.

Our analysis shows that the fund managers’ stock selection has been very strong over the long term and added value for investors. This is our preferred method of fund managers delivering positive performance as we believe it is a repeatable skill, although there are no guarantees. The fund can invest in smaller companies which adds diversification but also adds risk.

While over the long term the fund has beaten the FTSE All Share benchmark, since the beginning of 2016 it has matched returns, picking up slightly over the past two years. This is typical of UK equity income funds, which have tended to have a more value than growth bias, which has lagged the broader market. The Aviva fund has outperformed the IA UK Equity Income sector average over this period.

Looking ahead to what investors can expect from the UK market in the future, the managers welcome the recent rally from the lows of March and April but warn a potential second wave of the coronavirus will have a negative economic impact and be challenging for markets.

Past performance isn't a guide to the future. *Source: Lipper IM 31/07/2020.

Find out more about Aviva Investors UK Listed Equity Income, including charges

Aviva Investors UK Listed Equity Income Key Investor Information