A career in public relations could have awaited Chelverton UK Equity Income manager David Taylor if he had not decided to enter the world of investment.
Citywire AAA-rated Taylor cut his teeth working in financial PR in the City for six months as part of his business studies degree. He then went back to university to complete his final year. And when he left in 1983 he applied for a stockjobber role at Wedd Durlacher, which included analyst responsibilities. He covered small and mid caps, making prices on the stock exchange floor.
After four years in the stockjobber role, and in the wake of the Big Bang and Barclays’ acquisition of Wedd Durlacher, Taylor could see that the nature of trading was undergoing big changes and that the future of the jobber role lay in question.
He was interested in moving into fund management and successfully applied for a job running money in small and mid caps for the Merchant Navy Officers pension fund in 1988.
‘They wanted someone with experience in small and mid caps, and an understanding of trading, so my background at Wedd Durlacher was ideal,’ said Taylor.
Three years later he joined Gartmore, where he ran a combination of institutional funds and investment trusts, including the Clydesdale investment trust. In 1995, he joined LGT to manage small cap funds and then moved to HSBC Asset Management, where he spent nearly seven years as head of UK smaller companies.
His track record running the UK Equity Income fund alongside David Horner, also AAA-rated, is stellar. Over five years, the fund has had a 107.6% return, more than double the 52.4% of the IA UK Equity Income index. The fund has a historical yield of 4.7%.
The Equity Growth fund, launched in October of last year, has also fared well, up 28.1% over one year versus 15.2% by the average fund in the IA UK Smaller Companies sector.
Having specialised in small and mid caps for his entire career, Taylor focuses on this part of the market for the income portfolio. He likens his love for Coventry City Football Club to his day job, suggesting that small and mid cap fund managers like to back underdogs.
He and Horner invest in companies with a market cap north of £50 million going up to the FTSE 100. If any of their holdings move into the FTSE 100 they can only hold it until the first dividend has been issued and then they must sell. This is because it allows the Chelverton UK Equity Income fund to complement, rather than compete with, FTSE 100 funds.
Working for an independent boutique like Chelverton means that Taylor, unlike his peers from larger fund houses, is not under pressure to grow the fund ‘until it gets too big’, as he puts it.
Taylor describes his investment approach as being ‘fixated with income and yield’. This explains another aspect of his disciplined process, which is to only buy stocks with a dividend yield of 4% and higher on a one-year view. If any positions fall below a 2% yield, they sell.
‘The one thing that makes this work is discipline. If you are not disciplined and buy stocks that yield 3% rather than 4%, it undermines the whole raison d’être of what you are doing,’ he said.
Cutting out noise
Taylor describes his approach as being value-focused and akin to ‘income momentum’. He seeks to cut out short-term market noise, particularly when it is specific stocks.
Ashmore, the emerging market asset manager, represents a prime example. Following the market volatility in the summer, emerging markets have once again fallen out of favour.
The asset manager stands as the fund’s largest holding and Taylor believes the long-term investment case for the stock remains intact, in spite of negative sentiment towards emerging markets.
‘The reason we own Ashmore is because it gives us a 6% yield,’ he said. ‘It is a very good company that just happens to be in the wrong place at the wrong time. But I am sure Ashmore will have its day in the sun again at some point over the next two to three years.
'If in the meantime we are getting a 6% yield that is fantastic.’
As Ashmore’s share price has come under pressure in recent times, Taylor said he could not have a ‘portfolio of Ashmores’ because it does not offer capital growth. For this reason, he and Horner hold retailers and house builders elsewhere in the portfolio.
The managers are typically long-term investors, with 4imprint, Braemar Shipping and water business D Valley all featuring as positions that have been in the portfolio for many years.
‘Over the course of cycles, businesses tend to go up and grow,’ concluded Taylor. ‘What you are also trying to do is to avoid the real disasters. Something that helps you with that is experience, when you have been around for a long time.
‘You know some of the people you would not back again and some of the companies you would not back again because certain things went wrong last time. You have that experience. It sounds a bit trite but in small and mid cap, if you have been out there and kicked the tyres for quite a few years, you need to make sure you don’t make the same mistake twice.’