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Martin Currie equity income manager: Why we stick to old IA income requirements

19 May 2023

Ben Russon explains why his £1bn income fund still adheres to previous Investment Association rules, rather than relaced new ones.

By Tom Aylott,

Reporter, Trustnet

Income funds have been able to have a lower threshold of yield since 2016, when the Investment Association relaxed rules for funds in the IA UK Equity Income sector. 

But Ben Russon, manager of the Martin Currie Equity Income fund, said he continues to adhere to the old rules by allocating a third of his fund to stocks that pay a premium yield. 

The approach has worked, with the fund a top-quartile performer over the past decade, beating its peers by 27 percentage points. 

Here, the FE fundinfo Alpha manager tells Trustnet why he is unafraid of high-yielding stocks at the moment, why he stuck to his guns on the fund’s income requirements and how he has shifted between large- and mid-caps over the past year. 

 

Total return of fund vs benchmark and sector over the past decade 

Source: FE Analytics 

 

What is your investment strategy? 

Yield is important to us and we are looking for stocks that can help assist us to deliver a yield premium to the FTSE All Share, but we also consider the vehicle to be a total return strategy, so we want to beat the benchmark on a capital basis as well. 

Income is not the be-all and end-all. We're not chasing income for the sake of it and it's not the sole criteria that that we that we judge our investments on. 

Essentially, we have about a third of the fund comprised of typical yield stocks with a lower growth profile but a very consistent dividend track record. 

That leaves two thirds to invest in stocks that might have a yield that's less than the market but a really interesting capital growth story. 

 

What yield premium do you target? 

Historically, the traditional definition of an income fund was one that delivered a 10% yield premium to the FTSE All Share, but that threshold was lowered in 2016. 

To qualify in the income sector now, you just have to deliver any premium over three years, but we didn't lower our rules on that regard. 

 

What sets you apart from your peers? 

As I say, we stuck to our guns while there are obviously some people who have taken advantage of the lower threshold to deliver a lower level of premiums. 

I’m keen to stress that we do very much see ourselves as a total return strategy, so we’ve taken an approach of being a suitable vehicle for anyone who wants UK equity market exposure, as opposed to people who are just seeking additional yield. 

We commit to having 70% in the FTSE 100, so that gives us a more large-cap bias to the benchmark and therefore a less volatile and low-beta portfolio. 

That gives us more consistency – some people want high-risk, high-reward opportunities but others like the security and peace of mind that you get from a more plain and vanilla approach that we employ. 

 

By getting most of your premium from a small number of high-yielders, are you at greater risk of dividend cuts? 

Our two biggest holdings – Shell and BP – have actually cut their dividends in recent years, so that is a risk that we are mindful of. 

You can conduct a lot of analysis to try and reassure yourself and looking back over the past 10 or 15 years, stocks with a significant premium yield are often considered to be unsustainable. 

Whereas today, we’ve seen share price deratings across all parts of the UK market, which means their yields get elevated. 

In the past, a higher yield might have been a sign of distress or unsustainability but that's often not the case. This time around is just a function of the changing valuation framework around this end of the market. 

 

What was your best performer last year? 

Last year, it was very much those defensive areas which were also high yielding, which is unusual. Tobacco and oil and gas stocks did really well, so very much those environmental, social and governance (ESG) unfriendly areas. 

The first half of 2022 was all about the selloff in growth, so our strategy really benefited from the fact that we owned tobacco and oil.

BP and 
Shell each contributed 107 and 84 basis points to performance last year, while British American Tobacco added 65 basis points.

This year, we’ve bounced back from that low point of sentiment towards the UK and that’s taken a pro-cyclical shape. 

We’ve reversed from that negative sentiment towards domestics, so house builders and retailers have done well this year and our strategy held up well in both halves of that story. 

 

Did you sell out of any of those sectors on last year’s high? 

We took capital away from some of these FTSE 100 names and recycled that into FTSE 250 names that had fallen from that sentiment shift. It was a very a natural shift of the capital reflecting a big uptick in that part of the portfolio and a big downturn elsewhere. 

 

What was your worst performer? 

The worst performers were mostly house builders like Persimmon and Bellway (which detracted 113 and 67 basis points respectively) and retailers such as Next (which detracted 75 basis points) – a lot of those names that have now really benefited us in the past six months. Anything that was geared into financial markets also clearly had a tough time last year, such as Intermediate Capital Group which, drew 90 basis points from performance in 2022.

 

What are your interests outside of fund management? 

I’m quite family-oriented, so I spend a lot of time with my partner. I also like to ride my bike and I do throw my trainers on and do the odd run if I find the time. 

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.