Stock markets across the globe have experienced a torrid time over the past year amid fears over slowing growth in China, severe commodity price falls, and rising regulatory pressures on the banking industry.
Amid the turmoil many investors have favoured the perceived safety of high-quality growth stocks, favoured for their stable earnings, steady cash flows and often reliable dividends. Conversely, value stocks perceived to be lower quality and whose earnings are often reliant on the state of the economy have been shunned.
Funds focused on undervalued companies with unrecognised potential have therefore tended to struggle against their peers. The Majedie UK Income Fund is a case in point. Over the past year, Chris Reid and Yuri Khodjamirian, the fund’s managers, have continued to top up the fund’s exposure to out-of-favour areas, such as mining and financials, during times of share price weakness. While this positioning has impacted short-term performance, the managers remain focused on businesses in which they believe value will ultimately be unlocked.
Within mining, the managers believe the highest-cost producers will ultimately be driven out of the market. They have focused on companies that have cut capital expenditure and placed increasing focus on efficiency, productivity, and improving shareholder returns, such as Rio Tinto. They also feel a combination of lower demand and increasing supply will eventually come to equilibrium, supporting the prices of commodities such as iron ore. This should ultimately stabilise the outlook for companies in the sector.
In recent years, UK banks have rebuilt their capital requirements and now look far stronger than during the financial crisis. The managers suggest increasing regulation has forced banks to become more efficient. Their cost-to-income ratios have also fallen, which provides the potential for dividend payments to normalise in future (the lower the ratio, the more profitable the bank should be). Lloyds is currently held in the portfolio, while a number of insurers, such as Aviva and Legal & General, are also held.
Many investors have been put off telecoms given the heavily-regulated nature of the industry. However, the managers believe regulation across the UK and Europe is becoming more accommodating, while the sector is also undergoing a period of consolidation, which could encourage further investment in technology and infrastructure. Growth in data usage should also prove a boon to these companies.
Chris Reid and Yuri Khodjamirian admit they were slightly early to invest in supermarkets and a holding in Sainsburys, for example, is yet to pay off. That said, they feel the supermarket has done a good job of navigating the industry compared with its competitors, while they also believe the business recognises its key problems and expect it to make a comeback.
Our view on this fund
The UK managers at Majedie often invest with a contrarian tilt, aiming to identify positive trends and changes before others do. The fund should therefore be expected to go through shorter-term periods of underperformance at times. Indeed, the wider UK team at Majedie have occasionally been early with their views and in repositioning their portfolios, yet in most cases long-term investors have ultimately been rewarded for their patience. Please note the portfolio is concentrated, which enables each holding to have a greater impact on performance but this is a higher-risk approach.
This fund is currently positioned quite differently to many other equity income stalwarts, meaning it could dovetail well with funds with a greater focus on larger companies and more defensive areas of the market. Its focus on underrated areas of the market could bear fruit once they return to investors' favour. In the meantime, the fund currently offers an attractive yield of 4.31% (variable and not guaranteed).
We maintain our long-term conviction in the fund and in the solid and experienced UK team at Majedie. The fund remains 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 reduces the potential for capital growth.