Our UK Equity Funds Hit List Highlights Dividends and Dynamic Duos

Our special report week on UK investing continues with this round-up of promising UK-focused funds from the London manager research team

Morningstar Analysts 18 May, 2022 | 8:40AM
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As part of our special report week on investing in the UK, we asked our manager research team to compile a hit list of UK-focused strategies that pique their interest. Here is what they said.  

FTF Franklin UK Smaller Companies        

FTF Franklin UK Smaller Companies carries a Morningstar Analyst Rating of Bronze on its representative clean share class, and is managed by Dan Green, with support from Richard Bullas. Although Green’s portfolio management experience is relatively limited, he is well-versed in the team-wide approach, having joined in 2015 as an analyst focusing on small-caps before being named as co-manager in December 2017. The investment approach centres around the assessment of quality and valuation. Quality is assessed via three primary pillars: business risk, management risk, and balance sheet risk. Valuation is evaluated using metrics such as EV/EBITDA, price/book, and free cash flow yield. Green and Bullas seek to take a longer-term view of opportunities in the small-cap space, providing the opportunity to add value by taking advantage of the market inefficiencies that can arise in under-researched smaller-company stocks as a result of short-term news flow driving sentiment. Portfolio turnover is generally low, emphasising the consistent longer-term approach. Given the portfolio’s overall quality-growth tilt, performance has struggled recently amid the market’s value rotation, but longer-term returns remain strong.

Jupiter Special Situations            

Ben Whitmore's approach on Jupiter Special Situations (rated Gold on its representative clean share class) reflects his genuinely-contrarian and value-oriented investment philosophy. He uses quantitative screens to identify firms with attractive characteristics based on two key metrics: the Graham & Dodd price-to-earnings ratio and a Greenblatt screen that ranks companies based on their earnings yield and return on capital. Qualifying stocks are subject to fundamental analysis before being added to the portfolio, which is unconstrained relative to the FTSE All-Share benchmark. Whitmore has continually shown the courage of his convictions in building the portfolio, which can look quite different from the benchmark at the sector and market-cap levels. He has proved an astute investor over time, with a clear ability to select stocks in a dispassionate and disciplined fashion. His process means he can be early into names or avoid popular areas of the market, which can result in short-term relative underperformance, but, overall, this is a great choice for more patient investors, whom we expect to be well rewarded over a full investment cycle. Whitmore’s strategy faced headwinds for a number of years as growth stocks consistently led the market forward, but it comes into its own when value is in favour. This has led to a strong long-term track record overall, but it’s clear that investors need a long-term mindset when investing here.

BMO Responsible UK Equity

Catherine Stanley has managed BMO Responsible UK Equity (rated Silver on its representative clean share class) since 2009, making her one of the longer-tenured managers in the UK sustainable equities space. She leads a seven-strong investment team here. Her prior experience mainly lies in smaller companies, which is beneficial here, as many companies at the larger end of the UK market are excluded from the investable universe on sustainability grounds. The initial positive and negative ESG screening excludes companies in many of the industries one would expect, but its positive elements bring some flexibility, for example allowing some miners of metals that will be important for future decarbonisation and electrification networks. Given its ESG mandate, the strategy can suffer in times when sectors such as energy or mining perform strongly, which has been the case so far this year. However, stock selection has been the primary driver of strong relative returns over the longer term, and volatility has usually been lower than sustainable peers’.

Fidelity MoneyBuilder Dividend

A Morningstar Bronze-rated strategy, Fidelity MoneyBuilder Dividend is co-managed by the experienced Michael Clark and Rupert Gifford, who further benefit from Fidelity’s deep analytical capabilities. They target higher-yielding firms that can consistently deliver dividend growth over the long term. First, they look at the sustainability of the company's dividend in difficult environments, focusing on balance sheet strength and low correlation of cash flow to the economic cycle. Second, they try to establish to what extent companies can cover their dividend payments from the cash flow they create, by forecasting future dividends and cash flow – and whether future cash flow can cover increasing dividends. The last step is the valuation of any companies that have already passed the first two stages. The strategy’s defensive nature is evident in its risk/reward profile, with returns being far less volatile than both peers and the index. As a result, it has managed to protect capital relative to peers during declining markets. Amid the recent volatile market environment, the fund has stood up well, delivering top-decile returns within its UK equity income Morningstar category in 2022 to the end of April, and landing in the fourth percentile over the one-year period. 

JOHCM UK Equity Income

JOHCM UK Equity Income benefits from a long-established and successful management partnership, as well as a distinguished investment process. Clive Beagles and James Lowen have co-managed this strategy since launch in 2004. They dovetail with each other nicely, with Beagles focusing on macro factors while Lowen addresses bottom-up considerations. They have proved highly adept and disciplined in applying their contrarian approach to equity-income investing. The approach focuses on stocks with an above-market dividend yield and reasonable growth prospects. While a prospective yield above the FTSE All-Share Index benchmark qualifies a stock for investment (and conversely a sale if its yield falls to the index's level or below), its cash flows, balance-sheet strength, and valuation will determine whether it reaches the portfolio. The managers' focus on valuation tends to mean they exit fashionable areas early and select out-of-favour ones instead. As a result, the strategy can experience periods of highly-differentiated returns. Importantly, since inception, performance has been strong relative to the benchmark. This is also the case on a risk-adjusted basis, with stock selection the main driver of returns. It carries a Morningstar Rating of Silver.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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