- This fund is run by co-managers with considerable experience picking income stocks
- Investments in medium-sized companies can increase potential returns but also risk
- Analysis of environmental, social and governance (ESG) factors is fully integrated into the investment process
- 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 flows. The emphasis on dividends and dividend growth makes this a more conventional UK equity income fund, though it invests more in medium-sized companies than some others in the sector. While UK equity income funds have the flexibility to invest in some overseas companies, this one focuses purely on the UK. 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 relatively concentrated fund, so each holding can have a significant impact on performance, both positively and negatively, and can increase risk.
Chris Murphy has managed the fund since April 2009, and was joined by co-manager James Balfour in June 2016. The two co-managers have sector specialisms to support the wider team’s idea generation and we think these additional analyst responsibilities are complimentary to their fund management role. They are part of a UK equities team of six.
In June 2021 Aviva announced it would make redundancies in order to focus on key areas of strength. A number of people across the investment team left including CIO David Cumming and two people from the UK team. These changes do not weaken our conviction in the management of this fund which we continue to rate highly.
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 companies they believe have a sustainable competitive advantage over their peers, with the potential to pay high dividends. The managers look to build a portfolio of 40-75 stocks, in a way that provides consistent returns, although no performance is guaranteed.
To target this consistency, they look for companies with predictable, stable cash flows 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 isn’t guaranteed.
The managers have historically invested more in financials than peers. This includes insurance companies like Phoenix and asset managers such as Schroders as opposed to large banks. They believe these companies have better business models, providing better returns over the longer term. Changing pension regulations could benefit companies in the UK wealth market such as Rathbones.
There is also more in basic materials compared with some peers. BHP could benefit from China-led growth and its demand for iron ore and other related products. BHP provides an attractive yield whilst Anglo American provides important exposure to the types of metals that are going to be needed in Electric Vehicles.
The managers also invest in utilities that could be transformed as the network is bolstered for electric vehicles. SSE provides exposure to offshore wind and is a leading part of changing electricity generation.
Over the past 12 months a new investment in Britvic was added after a period of underperformance due to the effects of Covid-19. It has good long-term earnings helped by its 20-year franchise agreement with PepsiCo in the UK. It is also gaining market share within supermarkets.
Balfour Beatty and Ferguson were also added this year. Their finances are improving and greater expected infrastructure spending could enhance their opportunities. Following strong performance, the managers sold part of their investment in Intermediate Capital.
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 (environmental, social and governance) analysis is integrated into stock selection and included in every stock research note. Aviva has a large team of ESG analysts who provide data and information which the managers can utilise. They also lead engagement with companies and publish thematic research. Aviva has and continues to invest in their ESG resource across the business in terms of personnel and internal systems and processes.
ESG can be a challenge for income investors as some historically attractive sectors such as energy and tobacco are increasingly on the wrong side of the argument. ESG factors are another risk consideration and the team believe they have the right balance between avoidance and engagement.
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.
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, and 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 the fund managers’ stock selection has been 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 medium-sized and smaller companies which adds diversification but also adds risk.
Companies that have performed well over the past 12 months include Intermediate Capital Group, the alternative asset investment platform. It’s performed well over the long term too. Its share price fell in the early stages of the Covid-19 crises, so the managers bought more shares and benefited as its since recovered.
Signature Aviation, the flight support company, did well after it was acquired by private equity investors. St. James’s Place continued to grow strongly from increased savings. Lastly Grafton, the buildings merchant, benefitted from a booming DIY, refurbishment and construction industry as household improvements increased during the pandemic.
On the other hand, not owning mining company Glencore hurt performance as commodity prices recovered. The managers continue to think the company faces significant ESG risks which they feel detracts from longer-term cash flow performance. Greencoat UK Wind lagged a strongly rising market as it may not benefit as much from the renewable energy transition. The insurer Phoenix was weaker after another company sold its stake in the business.
|Annual percentage growth|
| Aug 16 -
| Aug 17 -
| Aug 18 -
| Aug 19 -
| Aug 20 -
|Aviva Investors UK Listed Equity Income||12.5%||4.7%||-1.0%||-9.9%||32.0%|
|IA UK Equity Income||10.8%||4.1%||-4.0%||-12.4%||31.4%|
Past performance isn't a guide to the future. *Source: Lipper IM 31/08/2021.