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JOHCM UK Equity Income
JOHCM UK Equity Income is a disciplined, high yielding equity income fund, managed by a very stable team. The fund invests in companies of all sizes but typically avoids the more expensive defensive parts of the market. This means it often has a bias in favour of cyclical stocks and has a naturally contrarian style.
Our opinion
This fund is managed by two of the most experienced UK Equity Income managers in the industry. It has delivered solid outperformance despite experiencing a long and difficult period for the fund’s contrarian value style. JOHCM UK Equity Income is generally more volatile than most peers. It could be an option for long term investors who want a high income and are not too concerned about volatility.
Company description
JO Hambro Capital Management (JOHCM) was established in 2001. It prides itself on removing bureaucracy and taking an entrepreneurial approach. Funds are run as separate entities and there are no house views. Each fund manager has their own unique franchise, receiving a performance fee, which aligns them with investors. The group was awarded the Elite Equities Provider rating in both 2015 and 2017.
Fund manager
James Lowen and Clive Beagles co-manage JOHCM UK Equity Income. James Lowen joined Newton Investment Management in 1998. He moved to JOHCM in 2004 and became co-manager of this fund in 2007. He holds a first class degree in Economics from the University of Exeter and has almost 30 years’ industry experience.
Clive Beagles previously managed the successful Newton Higher Income fund for 3 years before joining JOHCM in 2004. He has been a co-manager on this fund since April 2008. Clive holds a BA in Economics and has more than 30 years’ industry experience. Clive and James have worked together for many years.
James Lowen and Clive BeaglesFund manager
Investment process
The managers of JOHCM UK Equity Income believe in the power of dividend investing. Historical evidence has shown that dividend income has consistently contributed a high proportion of the UK market’s real returns. Consequently, this fund has a strict dividend requirement.
Every holding in the portfolio must yield more than the FTSE All Share on a prospective basis. This disciplined approach typically pushes the fund into a contrarian value style, as the managers are often buying unloved or out of favour parts of the market.
Clive and James screen the UK market daily to find new ideas. Their universe of higher yielding stocks compromises 120 to 140 companies in the mid and large cap index. They also like to buy high yielding smaller companies opportunistically. Unlike some peers, JOHCM UK Equity Income will also invest in UK mega caps and the managers believe they can often pick these up cheaply because they are ignored by other investors.
In recent years, JOHCM UK Equity Income has generally been positioned to outperform in a rising interest rate environment. The fund is typically underweight bond proxy parts of the market and generally overweight more cyclical stocks.
JOHCM UK Equity Income has a very strict sell discipline and even if James and Clive continue to like a stock it will still be sold if its prospective dividend falls below the FTSE All Share. The fund has a 15% performance fee on any outperformance of its index the FTSE All-Share.
The fund is reasonably concentrated with around 60 holdings. Approximately 50-60% of the fund is typically invested in the FTSE 100, with the remainder being mid and small caps.
ESG
ESG - Limited
JOHCM UK Equity Income uses an exclusionary screen which avoids companies that are non-compliant with the United Nations Global Compact and those which receive the lowest ratings (CCC) from MSCI. Despite these exclusions, Clive and James prefer to work with a company and believe shareholders can have more influence as owners rather than by simply divesting. They believe that companies which can improve their ESG are also more likely to be re-rated by the market and this will lead to a better investment outcome. They also like to focus on the positive impacts a company can have rather than just focusing on negatives. They are happy to own firms from a wide range of industries and this includes oil and mining stocks which have historically been a large part of the portfolio.
Risk
JOHCM UK Equity Income is quite a high-risk fund. It usually has a heavy overweight to more cyclical stocks, with large positions in financials, mining and consumer discretionary. The fund generally has little to no exposure to technology which typically does not meet the yield requirement. Other more defensive sectors such as healthcare or consumer staples are usually an underweight. Unsurprisingly, the fund is one of the most volatile in IA UK Equity Income sector over the past ten years*. Big drawdowns are not uncommon.
*Source FE fundinfo Ratio Table (Max Drawdown, Volatility) IA UK Equity Income Sector, 10 years to 2 May 2022
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