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Fund Research & Insights

Rensburg UK Equity Income

We think this fund has much in its favour.

Chetan Modi 30 May, 2008 | 9:48AM
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This fund boasts a veteran manager in Colin Morton, who has 17 years of managerial experience. Morton uses a blend of top-down and bottom-up analysis to guide his strategy here. He looks for macroeconomic themes that he thinks will help certain sectors outperform, and this analysis influences the fund’s sector weights. The bottom-up aspect of the fund’s strategy emphasises companies with strong free cash flow, which should give them the flexibility to fund growth without seeking additional equity capital. Equity financing can dilute shareholdings, reducing a stock’s yield per share and income for this fund. Morton also likes businesses with strong, recognisable franchises, which enables them to enjoy some pricing power in their respective markets. Finally, Morton prefers stocks that are tr

ading at reasonable valuations in relation to their earnings (on an enterprise value to EBIT basis).

Morton’s penchant for companies with strong free cash flows and some pricing power, along with his macroeconomic analysis, has led him to the energy sector in recent years. The fund is currently overweight its average Morningstar Large Cap Value Equity peer in energy by a relatively small amount, 1.3 percentage points. Rising oil prices have bolstered the profit margins of integrated oil companies and have led to healthy yields.

Given this fund’s income mandate, it’s not surprising that Morton is also drawn to other high yielding areas, like utilities. The fund’s utility weighting is 4.4 percentage points higher than the typical UK Large-Cap Value fund. Utility companies benefit from a relatively steady stream of cash flows which raises the prospect of consistent dividend pay outs over time.

We think Morton’s strategy makes sense and the portfolio’s current positioning is consistent with his approach. However, this fund’s biases also expose it to certain risks. For instance, the energy overweight relative to its Morningstar peer group could be a liability if oil prices fall. Plus, the fund’s energy exposure has a high concentration in just two stocks: BP and Royal Dutch Shell account for fourteen per cent of the portfolio, exposing the fund to company-specific risk. Finally, macro calls are tough to get right consistently, and Morton isn’t always on target. For example, in 2005, the fund trailed its typical category rival because Morton kept the fund light in mining stocks, a leading sector that year.

But the fund’s long-term record shows that such missteps are the exception rather than the rule. The fund ranks in the top quartile of its Morningstar category for the ten- and fifteen-year periods through April 2008. Moreover, Morton has managed risks well over time. The fund exhibits lower volatility (as measured by standard deviation) than its typical category peer.

Although the fund can sometimes misfire over short periods, we think Colin Morton is a skillful manager who deploys a strategy that is well placed to yield income with solid capital growth for investors over the long term.

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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About Author

Chetan Modi  is a fund analyst at Morningstar OBSR.

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