- The managers are experienced and work with a supportive investment team
- The fund aims for income and capital growth by investing in unloved companies
- The fund has material weightings in medium-sized and smaller companies which increase risk
- This fund doesn’t feature on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential
How it fits into a portfolio
J O Hambro (JOHCM) UK Equity Income aims to grow both capital and the income it pays. The fund invests quite differently from the average UK equity income fund, focusing on the shares of unloved companies that the managers consider to be wrongly priced. This approach means that the fund can have periods of underperformance if it’s out of favour. The fund also invests in smaller companies which add risk. This fund would provide diversification to an income portfolio, or to a broader UK portfolio focused on larger companies.
The fund has been managed by Clive Beagles and James Lowen since its launch in November 2004. Beagles is a veteran UK equity income investor, having previously managed income funds at Newton from the mid-1990s. Lowen was previously an investment director at Newton involved with UK equity strategy and corporate governance issues. The managers are completely focused on this strategy, running no other retail funds. The length of this management combination brings a level of continuity that is quite rare to see.
The managers look for companies unloved by the wider market which will deliver both a rising dividend and long-term capital growth for investors. Unlike some other UK equity income funds, they invest in companies of all sizes, typically investing around half of the fund in small and medium-sized companies. The managers limit the amount invested in smaller companies to control risk and have recently slightly reduced their exposure.
The managers look for companies they believe will pay a higher dividend than the FTSE All Share index in the near term, which they believe will grow over time – although there are no guarantees. They have a strict yield discipline and if they forecast a stock will pay out less than the index they will remove it from the portfolio.
The income and growth focus means the fund has a contrarian approach. This means the managers invest in out of favour areas of the market, including life Insurance via companies such as Phoenix Group, mining like Glencore and media company ITV. They have much less of the fund invested in pharmaceuticals and personal care and grocery stores than the FTSE All Share index. They have no investments in tobacco or beverages.
Over the past 12 months new investments included Bellway, while housebuilder Countryside was sold. According to the managers, Bellway had a lowly valued share price, had an attractive yield and a strong balance sheet. With a supportive government policy framework this area remains interesting.
National Grid was also added as it could benefit from the change in mix of electricity supply that will require significant investment in networks to connect offshore wind farms to the grid. It could do well in both the UK as well as US markets.
International Personal Finance is a leader in niche lending markets in parts of eastern Europe and Mexico. The shares sold off heavily through the Covid pandemic. The company has a strong balance sheet and has begun its recovery aided by having fewer competitors than before.
On the other hand, McCarthy & Stone was sold after a bid was announced from a private equity buyer which exposed the value on offer. Mondi had recovered to its pre Covid-19 share price and had performed well and so was sold. SSE benefited from the transition from fossil to renewable forms of energy. This trend resulted in a higher valuation that the managers struggled to justify and so it was sold.
J O Hambro Capital Management is a boutique asset manager with a range of global, country or region-specific equity strategies. There is no house view at JOHCM, and fund managers are free to invest in the best way they believe will achieve a fund’s aim.
JOHCM has typically attracted entrepreneurial established fund managers, who wish to manage funds with a clear alignment of interest between themselves and their investors. Fund managers are incentivised in-line with the performance targets and the growth in size of their funds. A percentage of their bonuses are paid in shares in the business, and a portion invested into the funds they run. This helps the fund managers to focus on long term performance. It also prioritises the performance rather than purely maximising assets at the expense of performance.
JOHCM takes environmental, social and governance (ESG) issues seriously, hiring the highly regarded ESG team from Hermes Investment. They believe implementing these considerations into the investment process can improve long term returns. JOHCM are also signatories to the UN PRI and adhere to the principals of the UK stewardship code.
Investors should be mindful that the value-style means the portfolio could be invested in sectors traditionally considered non-ethical, such as energy, oil and mining companies.
The fund has an annual ongoing charge of 0.67%. There is also a performance fee if the fund outperforms the FTSE All Share index, of 15% of the surplus performance. Investors should note that charges are taken from capital which can increase the yield but reduces the potential for capital growth. An HL platform fee of up to 0.45% a year also applies.
Since launch the fund has outperformed both the FTSE All Share index and the IA UK Equity Income sector average*. The fund’s value approach and bias to small and medium-sized companies can result in volatile performance though.
Performance was especially weak through the initial period of the Covid crisis as smaller companies and cheaper companies fell out of favour. Following the announcement of the successful vaccine last November smaller companies and companies that had previously been out of favour recovered strongly.
Performance over the past 12 months was strongly ahead of the index. The fund’s sector allocations helped, including the higher weighting to basic materials. Individual stock choices also boosted performance.
Investments in the UK supermarket chain Morrison’s, which received a takeover bid, recruitment company SThree and trading and mining operator Glencore all contributed well to performance. Investments in Asian focused bank Standard Chartered, insurer Phoenix Group and not holding international beverage company Diageo all hurt performance.
|Annual percentage growth|
| Aug 16 -
| Aug 17 -
| Aug 18 -
| Aug 19 -
| Aug 20 -
|J O Hambro UK Equity Income||19.7||6.7||-10.8||-20.2||51.5|
|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. Income reinvested.