Fund in focus: Man GLG UK Income

Posted by Liz Rees in Fund and industry updates category on 29 Jan 20


The proposition

The fund aims to outperform the total return on the FTSE All-Share index over the long-term (5-year rolling periods). The yield must be at least that of the index and dividends are paid monthly.

At least 80% of the portfolio is in companies that are listed in the UK. Up to 20% may be invested overseas and the fund invests selectively in Europe, usually where no equivalent opportunity exists in the UK.

The manager will hold up to 10% in bonds but issuing companies must also have listed shares for comparative analysis.

The team

Manager Henry Dixon has over fifteen years of investment management experience and is assisted by portfolio manager Jack Barrat and analysts Alice Owen and James Houlden.

The team also draws on economic and strategic research capabilities within Man GLG, as well as the highly regarded bond team. Supplementary third party research is used when appropriate.

Investment philosophy & process

The managers believe that using a range of valuation methods is the best way to identify investment opportunities. Statistical screening identifies two groups: ‘undervalued assets’ and ‘undervalued returns’.

‘Undervalued assets’ are companies that trade below the team’s estimated valuation of physical assets such as property, plant and equipment, or their replacement cost. ‘Undervalued returns’ are companies generating profits that the managers believe to be underappreciated, and therefore undervalued, by the market.

At the end of December 2019, the team’s analysis of the top 100 UK companies classified 19% of shares as ‘undervalued assets’ and 34% as ‘undervalued returns’ whilst the remainder were, in their view, overvalued. The fund held 68% and 32% respectively in each category.

Some say everything has a price, but Dixon does not compromise on quality. He targets businesses with substantially stronger than average balance sheets and potential for dividend growth of double that of the market. The strategy also places emphasis on earnings progress throughout the economic cycle as well as robust cash-flows.

To compensate for the additional risk involved, Dixon seeks a greater upside potential when investing in smaller companies than when investing in larger ones. . , The size of individual positions reflects the level of risk taken with regard to size, volatility, liquidity and cash generation. Liquidity is particularly important so he avoids very small, and unlisted, companies.

Dixon’s process incorporates a strict sell discipline and profits are taken when a pre-determined price target is reached, based on a re-assessment of fair value. The team do not expect all their calls to be successful - 3 out of 4 is the goal - and they will sell if there is a deterioration in cash generation.

Performance & costs

The fund has done well during Dixon’s tenure. Since he took charge on 30th November 2013 it has produced a total return of 83% compared with 45% for the IA UK Equity Income sector*.

The total return for 2019 was 22% versus 20% for the IA UK Equity Income sector*. The strategy did particularly well in the final quarter, illustrating the extent to which it is exposed to the UK domestic economy.

The ongoing charges figure is 0.9% but additional transaction charges may be significant since this is a very active strategy. Turnover may therefore be high, particularly in volatile markets. However, retrospective analysis by Man GLG, using specialist software, has confirmed that the approach has enhanced historic returns. Of course, this is not a guide to future outcomes.

Fund positioning

This is a multi-cap fund and at 31 December 2019 the portfolio had 57% of its holdings in FTSE100 listed companies, 26% in  FTSE 250 companies and 6% in FTSE Small Cap/other companies. The balance was in European shares, bonds and cash. There were 64 holdings and the portfolio has not tended to closely track its benchmark.

The largest sector exposures are consumer durables, transportation, insurance, food, tobacco and banks. The Top 10 holdings include well-known names such as Royal Dutch Shell, Imperial Brands, L&G, Barclays and Easyjet. The value style produces a bias to cyclical companies and the fund deviates substantially from its benchmark as some sectors, such as technology, are largely excluded on valuation grounds.

Mid-Cap company Computacenter was added in May 2019 after analysis suggested market expectations for the full year were conservative, providing upside potential to profits along with synergies from the integration of a US acquisition completed in 2018. The shares rose significantly in response to a positive trading update in mid-December.

Targeting undervalued companies means the fund tends to experience its fair share of takeover bids; recently Hansteen gained 12% in response to a bid from Blackstone. As the deal was agreed, the shares were sold and an alternative investment identified.

Outlook

Dixon expects further corporate activity as predators take advantage of depressed valuations. UK stocks, in his view, are very cheap versus their international peers. He is optimistic about the future as consumer confidence improves amid a tight labour market.

The team are finding exceptional value opportunities in their universe with many companies offering attractive dividend yields. However, the extent to which dividends are covered by earnings has deteriorated so it is crucial to avoid traps where dividends may be cut.

Nevertheless, Dixon believes his portfolio is capable of delivering dividend growth of 10% this year. Dividends from companies held in the fund are currently backed by net cash, so there is potential for dividend surprises.

Our view

Henry Dixon’s performance record and disciplined style could justify the label of ‘star manager’ yet he is a modest and unassuming individual who takes the responsibility of managing investors’ savings very seriously. He also invests substantial amounts of his own and his family’s money in his funds.

There is significant overlap, of around 65%, with the Man GLG Undervalued Assets fund that the team also manage. However, this higher yield strategy might be of particular interest to anyone seeking a regular income.

*FE Analytics 31st December 2019

Important information: Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Nothing in this article is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment.