J O Hambro UK Equity Income – Grasping opportunities in the UK stock market

• The managers think some UK-focused companies are attractively priced
• They’re less excited about traditionally defensive parts of the market
• Long-term performance has been excellent but the fund didn't perform as well as the broader UK market over the past year

Our view

Two things differentiate the J O Hambro UK Equity Income Fund from others in the UK Equity Income sector. Clive Beagles and James Lowen invest more in smaller and medium-sized companies than some equity income managers. These companies have great long-term growth potential, though they're higher-risk than larger companies.

They also invest in businesses that aren’t doing so well today if they think their prospects will improve in the future. It allows them to buy shares at attractive prices, with room for future growth. Lots of managers invest this way, but Beagles and Lowen stick to it through good times and bad. Not all managers can say the same. We like their disciplined approach.

Beagles and Lowen have a good long-term track record but the fund doesn’t feature on the Wealth 50. There are other great UK Equity Income options available with lower charges. The fund also has a performance fee, something we’d prefer not to see. Details of the performance fee can be found in the KIID. Our platform charge also applies.

Performance

The fund lost 0.9% over the past year compared with a gain of 6.4% for the broader UK stock market. Investments in the financial sector didn’t help. Standard Life and Aberdeen merged last year and the combined company hasn’t performed well since, partly because investors have sold its funds. Vodafone also performed poorly because investors thought there would be a dividend cut.

Other investments performed better though, especially those that are affected by commodity prices and that make more money overseas. Oil and gas giant BP made the biggest positive contribution to returns. Miners Rio Tinto and Anglo American also performed well.

The fund’s yield is currently 5.3%. This is variable and not guaranteed. The fund takes its charges from capital which increases yield but reduces growth potential.

Past performance is not a guide to the future. Source: Lipper IM to 31/03/2019. Return figures include dividends the fund has generated.

Long-term performance of the fund has been excellent. The below graph illustrates this, showing performance with dividends re-invested.

Past performance is not a guide to the future. Source: Lipper IM to 31/03/2019.

Outlook & fund positioning

Beagles and Lowen think parts of the UK stock market offer good value. They believe the price you pay for a share has a big bearing on future returns. Being able to invest in shares at what they consider to be attractive prices makes them feel positive about the fund’s prospects. Future performance isn’t guaranteed though.

They think once the Brexit fog clears, the pound will strengthen. Profits made abroad will be worth less when converted into pounds. So, companies that sell goods and services in the UK could perform better than those whose customers are overseas. Their investments in house builder Galliford Try, and supermarket chain Morrisons could benefit if this happens.

They’ve not given up on all companies that make their profits outside the UK. They don’t have so much invested in traditionally more defensive areas like personal goods or drinks companies. Investor’s desire for companies with predictable sales has pushed up share prices to levels the managers find unattractive. They think there’s better value in companies that rely on the strength of the economy, such as commodity specialist Glencore which is generating a lot of cash. They also think the recent upswing in oil prices will help oil producer BP. Both companies are held in the fund.

Key investor information

More on this fund, including charges