There aren’t any fancy tricks up veteran manager Richard Hughes’ sleeves. He focuses on generating income, and aims to invest in UK firms that are producing a dividend yield that’s at least 33% higher than that of the FTSE All-Share. That’s not always feasible in certain market environments, but the fund’s focus on income stream has fared well in practice: its trailing twelve-month yield ranks 12th highest of 69 funds in Morningstar’s UK Large-Cap Value cat
egory and 14th of 93 funds in its IMA UK Equity income sector.
What really differentiates Hughes from his equity income peers, then, is his patient execution: when he says long-term, he means it. While some equity income managers we speak to tend to consider anything above three-years as long-term, Hughes’ average holding period is typically twice that, at six years. His portfolio turnover rate, an extremely low 1.29% as of July 2006, attests to his patience (it also limits trading costs, which should give the fund an edge over its peers). Hughes’ patient style might be a product of his extensive experience: he has been managing funds for nearly thirty years (twenty of those at M&G and five at this fund). Having invested through several market cycles, he tends to be more cautious than managers who’ve only invested through bull markets.
Low-turnover certainly doesn’t mean low results, though. Boosted by his high-yielding companies, the fund under Hughes has ranked in the top-quartile of both its category and IMA sector over the three- and five- year time periods. What’s more, Hughes has managed to do this with below-average volatility versus these peer groups (as measured by three- and five-year standard deviation). On occasion, he does dip into more aggressive mid-cap territory when he sees particular value there (as he has in the past six months), but is careful to rein in this added risk. By December 2006, for instance, he had pushed back this exposure again to below the category average (21% of assets). It’s also worth noting, though, that the fund could lag other UK equity funds when growth stocks are heavily in favour (e.g. the 2003 speculative rally when the fund was slightly below the category average). That said, we think investors would do well to sit tight through such periods, as Hughes has had a proven record of being able to reward investors over longer periods.
With experienced management, low volatility, and a salient strategy, we think this is a very good choice for investors looking for core equity exposure.
