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Why Chelverton's AAA-rated Taylor bought Jupiter & River and Mercantile

Why Chelverton's AAA-rated Taylor bought Jupiter & River and Mercantile

Chelverton UK Equity Income manager David Taylor (pictured) is positive on asset management.

The Citywire AAA-rated manager pointed to the potential dividend growth offered by asset managers, which should benefit from an improvement in markets.

This month Taylor initiated a position in Jupiter Fund Management, highlighting the cash the business is releasing to shareholders. He also participated in the River & Mercantile share placing.

‘Historically it has been very rare for us to buy into IPOs, because they have not yielded much, but now quite a number of them have come to us with good yields. We just bought River & Mercantile at a yield of more than 5%.’

Meanwhile, the manager has added to the fund’s position in life company Phoenix, which now stands as the biggest position in the portfolio. He took advantage of share price weakness following the government’s decision to no longer make annuities compulsory as part of this year’s Budget.

The Chelverton UK Equity Income fund, co-managed by David Horner, is top quartile in one, three and five years to the end of May. Over the past three years it has returned 67.6%, making it top of the IMA UK Equity Income sector, which posted an average return of 36.2%.

The fund has struggled more recently, however. It ranked third quartile from January to the end of May, which Taylor attributes to its small cap bias.

‘One good thing is that dividends are still growing,’ he said.

‘In March there was earnings disappointment, but dividends were better than expected. Companies are comfortable that earnings will grow, it just has not happened yet. When you are more comfortable you are more likely to pay dividends.’

The £313.5 million fund has grown rapidly and is no longer being marketed. Taylor said the upcoming launch of a new UK small cap strategy was not intended to divert inflows from the existing strategy.

He added that investment into the existing fund had slowed ‘dramatically’ as small and mid caps have fallen out of favour.

He is also using what he sees as a ‘directionless’ market to ramp up the income component within the fund before growth comes back into favour. He says the market is going ‘sideways’ following the recent rotation into large caps.

While many fund managers are pinning their hopes on the next set of earnings due later in the summer, Taylor thinks we might have to wait until later in the year or even 2015 until earnings growth comes through.

The fund’s yield currently stands around 4.3%, up from 3.8% at the end of January. Taylor has focused on increasing the fund’s dividend in recent times to insulate the portfolio ahead of an anticipated rally in growth stocks.

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