Majedie Asset Management has opened up a top performing UK equity income fund to the wider market, Wealth Manager can reveal.
Chris Reid (pictured) has been running the Majedie UK Income fund behind closed doors after the boutique seeded the strategy with £10 million back in December 2011.
According to the group, the fund has returned 19.9% since its inception, outstripping the 15.3% return on the FTSE All Share (TR) Index over the same stretch.
This performance has convinced the group to launch the fund into the market to enhance its UK equity proposition.
Majedie chief executive Rob Harris told Wealth Manager: 'UK equity income has been a gap on our roster. We would never launch a fund to investors unless we have conviction that it can perform well and has a sufficiently distinctive approach. Equity income is an area we have considered for some time; we are now confident we have the skills in place to make a proper success of it.'
The fund, which yielded 4.6% in 2012, combines capital appreciation with income in a bid to maximise the total return for investors.
'This is not a run of the mill income fund,' Harris said, adding it has delivered this performance by adopting a 'distinct' approach and shying away from the usual suspects – companies with a high yield but often limited growth prospects.
'Instead [we are] looking for future money makers that may be hidden from view,' he said.
Reid, who joined Majedie in 2008, said: 'The UK Income fund is fundamentally a stock picking fund. The process is simple – we are looking for cheap companies that are changing for the better and will deliver appropriate levels of income while this change takes place.
'You may not see the typical high yield stocks in this portfolio. We currently hold a good mix of cyclicals with strong balance sheets, paying a decent yield, and undervalued defensives that could re-rate.
'We want under-managed businesses with strong financials, companies gaining market share that are looking to be future leaders and undervalued pariahs becoming investible.'
In essence if a company has good dividend cover and growth prospects which is not reflected in the yield, Reid is happy to invest as long as the company is 'transforming'.
He uses EasyJet, which represents 4.7% of the fund, as an example of such a stock. 'The stock gave a 10% yield last year, with a special dividend accounting for 8% of this. The stock is now yielding 3% and is 3 times covered by earnings,' Reid explains.
'This is a good example of a company that has transformed and its income has come through. The clues were there 15 months ago. The company was under-managed and underpriced and for the dedicated analyst the opportunity was there.’
The fund holds 47 stocks at launch and its flexible style allows it to invest across the market spectrum.
Its biggest holding is traditional income staple National Grid, which accounts for 6.5% of the fund.
However, Reid stresses he does not invest in a company simply for it defensive characteristics. 'Even our defensive holdings are going through transformation. National Grid for example, is on a 6% yield and gaining more clarity on regulation.'
Aviva, which is undergoing a major restructure after shareholder discontent, is another fixture in his top 10 holdings representing 4.4% of the fund. 'The stock market concluded it [Aviva] was following the wrong strategy and we saw an opportunity,' Reid said.
He also uses his 20% overseas allowance to smoke out opportunities across the globe. Swiss drugs firm Roche, which accounts for 3.4% of the fund, is an example here. 'It [Roche] has the potential to be an industry leader and because of its strong research capabilities its going to do well.’
In keeping with its investment philosophy Majedie will keep a tight rein on capacity, with the workings of the strategy reviewed once assets under management hit £500 million.
'We will review the size of the fund if and when it reaches £500 million,' Harris said. 'We know from our experiences of working at larger firms that increasing the size of assets under management reduces the investment universe and limits the opportunity to rotate the portfolio. This is a philosophy firmly held since Majedie was formed 10 years ago.’