CF Miton UK Multi Cap Income, CF Lindsell Train UK Equity and Royal London UK Equity Income are three funds that Equilibrium’s Mike Deverell (pictured) believes will provide investors with an optimal balance of downside protection and steady returns over the long term. 
This comes as the fourth instalment of our ongoing series (previous articles have featured Martin Bamford, Adrian Lowcock and Jason Hollands), which asks the professionals which three funds they would place together within one portfolio so that investors can hold on to their investments and sleep soundly at night.
In the below article, Deverell provides his three fund picks for those looking to diversify their UK equity exposure and explains how each of them complement each other
CF Miton UK Multi Cap Income
Headed up by veteran small-cap manager Gervais Williams and FE Alpha Manager Martin Turner, the five crown-rated fund adopts a multi-cap approach to long-term income generation and capital growth.
While the fund can indeed invest across the market cap spectrum, it tends to have a bias towards AIM stocks and micro caps. For instance, its current weighting in AIM stocks is 35.2 per cent and its next largest cap weightings are FTSE 250 companies at 17.7 per cent, FTSE 100 stocks at 17 per cent and UK small caps at 15.4 per cent.
Over five years, the £923m fund has outperformed its average peer and the FTSE All Share (which it is not benchmarked against) by 60.68 and 65.21 percentage points respectively with a total return of 128.98 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
It has done so with a top-quartile annualised volatility, Sharpe ratio (which measures risk-adjusted returns) and downside risk (which predicts susceptibility to lose money during falling markets).
Deverell said: “One I think you can bank on is the Miton UK Multi Cap Income. It is run very cautiously by manager Gervais Williams with a strong focus on companies with low debt and good cashflow.
“It will make some very good returns if the UK economy remains decent, but also provides plenty of downside protection should the market see a setback.
“As well as the solid nature of the companies it holds, the fund also has a FTSE ‘put’ option which should cushion any market fall.”
The fund’s put option is one of its highest individual weightings at 1.9 per cent, beaten only by shipping services company Stobart Group at 2.4 per cent.
Overall, the fund has a highly-diversified portfolio of 151 stocks to minimise any potential liquidity concerns that come with investing in smaller companies.
“This would complement more growth-oriented funds, as well as those that invest more into large-cap equities,” Deverell added.
Had an investor placed an initial £10,000 into the fund five years ago, they would have received £3,073.09 in income alone.
CF Miton UK Multi Cap Income has a clean ongoing charges figure (OCF) of 0.81 per cent and yields 3.87 per cent.
This four FE Crown-rated fund has been headed up by Martin Cholwill since 2005 and aims to provide income as well as some capital growth over the long term.
Over five years, the £1.9bn fund has returned 95.26 per cent compared to its sector average and benchmark’s respective gains of 68.3 and 63.77 per cent. Over the same time frame, an investor would have received £2,686.78 in income alone based on an initial £10,000 investment.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
“The Royal London Equity Income fund would complement the Miton fund well,” Deverell said. “It has a similar focus on robust cashflow and sustainable dividends, but with more of a large-cap bias.”
Cholwill adopts a multi-cap bottom-up approach to stock selection and aims to find companies with strong business models and solid management teams. He will also only buy into companies that he believes can maintain and grow their dividends over time.
Examples of the fund’s largest individual holdings include Royal Dutch Shell, HSBC and GlaxoSmithKline, with its list of top 10 constituents accounting for 35.8 per cent of the overall portfolio.
The FE Research team, which has awarded the fund a place on its FE Invest Approved list, said its bias towards medium-sized companies relative to the large-cap dominated FTSE All Share could benefit the fund over the long term.
“Medium-sized dividend payers have been relatively overlooked as they are regarded as less defensive,” it said. “Nevertheless, it would be wrong to see the fund as a medium-sized focused fund, as Martin Cholwill invests with little consideration to the market capitalisation.”
Royal London UK Equity Income has a clean OCF of 0.68 per cent and yields 3.82 per cent.
The third and final investment on Deverell’s list is FE Alpha Manager Nick Train’s five crown-rated CF Lindsell Train UK Equity fund. Train is well-known for his bottom-up and very long-term approach to stock selection, which results in a very highly-concentrated portfolio with a low turnover.
“Another fund which works well with Miton is the Lindsell Train UK Equity fund,” Deverell said. “This is a concentrated portfolio of stocks with much more of a growth bias.
“Many of the stocks it holds are multinational firms which make much of their earnings overseas. Again, this complements the Miton fund which has more in UK domestic stocks.”
Over the last five years, the £4.1bn fund has outperformed its sector average and its FTSE All Share benchmark by 53.1 and 60.63 percentage points respectively with a total return of 124.4 per cent. It has done so with a top-quartile Sharpe ratio, a second-quartile downside risk ratio and a bottom-quartile annualised volatility.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
When it comes to sector allocation, Train has a preference for luxury goods and beverage companies with long legacies and histories of family ownership.
He told FE Trustnet in an article published in July: “Really durable family fortunes are strong indicators. You have to look at how certain families have made a lot of money and have then been able to maintain that money over generations; lots of people get rich for a generation and then lose it.
“It has always struck us how beverage brands have maintained values over really, really long periods of time. Dr Pepper, which we have invested in, is older than Coca Cola as a brand. Irn Bru was created in 1901. The newest holding we have, Remy Cointreau, the history of that company begins in 1724.
CF Lindsell Train UK Equity has a clean OCF of 0.72 per cent.