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Chelverton UK Equity Income Fund research update

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.

2014 was a disappointing year for the share prices of UK small and medium-sized companies, but the tide has turned so far in 2015. Oil, gas and commodity companies account for almost 20% of the FTSE 100 Index and against a backdrop of falling oil and commodity prices, the share prices of many of the UK's largest companies have fallen. Large UK companies also generate around 75% of their earnings overseas and as such have been negatively affected by concern over slowing growth in China. Many UK equity income funds focus on larger companies and have therefore struggled, particularly in the latter half of this year.

Small and medium-sized companies tend to be more domestically focused, with fortunes more closely linked to the UK economy. There are a number of UK equity income funds with a bias to small and medium-sized companies and one of the earliest to launch, in December 2006, was the Chelverton UK Equity Income Fund, managed by David Horner and David Taylor.

The managers are strict in their requirement for any potential investment to yield at least 4% at the point of purchase. The managers' focus on income generation has paid off and £10,000 invested 5 years ago would have generated £3,326* income to date. Excluding funds which make use of financial instruments to boost their yield (often at the expense of capital appreciation) this is the most income produced by a UK equity income fund over the period, although past performance is not a guide to the future.

Since launch, the fund has outperformed the IA UK Equity Income sector by 31.2%* and the FTSE All Share Index by 27.7%. Please remember past performance is not a guide to future returns. Our analysis suggests the majority of the fund's outperformance relative to these benchmarks can be attributed to the managers' bias to higher-risk small and medium-sized companies, which have outperformed their larger counterparts since the fund's launch.

Performance of the Chelverton UK Equity Income Fund since launch

Performance graph

Source: Lipper IM to 02/11/2015

Annual percentage growth
Nov 10 -
Nov 11
Nov 11 -
Nov 12
Nov 12 -
Nov 13
Nov 13 -
Nov 14
Nov 14 -
Nov 15
FTSE All-Share -1.98% 13.86% 21.17% 0.22% 3.87%
Chelverton UK Equity Income Fund -1.37% 23.61% 44.16% -0.01% 16.41%
IA UK Equity Income -1.26% 13.04% 25.23% 1.83% 7.66%

Past performance is not a guide to future returns. *Source Lipper IM to 02/11/2015.

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The fund recently benefited from exposure to retailers N Brown, Debenhams and WHSmith, which have all performed well. This highlights the resilience of the UK consumer, in the managers' view. With this in mind, they recently initiated a position in furniture retailer DFS to add diversification to their retail investments. The managers are positive on the dividend outlook for the company as they recently announced strong results and better than expected cash flow.

Elsewhere, the fund has been adversely affected by weakening industrial demand. Consumer services and industrial companies account for a large proportion of the smaller companies universe and over half the portfolio is exposed to these sectors. Therefore, stocks such as Brammer, provider of industrial maintenance and repair products have fallen in value. The managers expect industrial companies, especially those with oil & gas exposure to remain weak over the coming months, but they expect to use this weak period to identify new opportunities at attractive prices. They will continue to hold Brammer as they expect the stock to recover in the medium term - as the stock currently yields an attractive 6% (variable and not guaranteed), they are being paid to wait.

Our view on this fund

We are positive on the long term potential of investing in smaller companies and like the approach of focusing on those which provide an income. Our analysis suggests these stocks tend to perform well over the long term, and it is the fund's bias to this area which has driven returns. However, the manager has added very little value through his stock selection and we tend to favour managers skilled in this area as they are able to add more consistent value for investors over the long term, in our view. The fund therefore does not feature on the Wealth 150 list of our favourite funds across the major sectors.

Please note the fund's charges can 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.

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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