clerical medical's equity high income fund has outpaced its rivals by picking stocks that are not as bad as the market assumes
Having spent 17 years managing the Clerical Medical Equity High Income fund, soon to be rebranded as Insight, William Claxton-Smith is the eighth longest-standing fund manager in the UK.
But this is only one of his many achievements. In 16 of the 17 years of managing the fund, with the exception of 1996, he has outperformed his peer group.
Over that period, annual income distributions on his fund consistently increased and have never been cut. Performance since launch and over recent periods is also sound. The £745m fund boasts an A rating from Standard & Poor's. The fund is currently yielding 4.1%.
Claxton-Smith's approach involves focusing on undervalued, high-yielding stocks and using convertibles for their yield premium to gain exposure to lower-yielding sectors.
How do you construct the portfolio?
My style is an adaptation of the normal Insight house style which is research-based and focused on stock picking.
In seeking growth stocks for other portfolios, the team tries to identify companies that have better prospects than the market is assuming.
By contrast, as an income investor, I am looking for stocks that aren't as bad as the market assumes they are.
Therefore, I focus on undervalued, high-yielding stocks. I do have the market constraint of having to produce the income for investors, so I never buy anything that yields less than the market. More often, I prefer stocks that are yielding significantly more than the market. Currently, for example, I'm targeting yields of around 5%.
Do you have automatic sell disciplines should the yield on a stock fall below the market level?
There have been occasions when I have held stocks that yield less than the market and, in fact, one or two occasions when stocks have yielded nothing.
In these cases, the income has not been attractive in the short term but I have deemed it inappropriate to sell the company because there was still value in the stock.
So, while I wouldn't go out and buy that sort of stock, I will hold them in the portfolio subject to the constraint of ensuring there is sufficient income coming in through other sources.
Do you ever hold bonds?
I don't have bonds but I do occasionally invest in convertibles. In most cases, this is to provide exposure to sectors where there would not otherwise be yield opportunities, such as telecoms.
I have never held any more than 15% of the portfolio in convertibles and my current exposure to this area is quite a lot less. The types of convertibles I hold would not necessarily be issued by companies; they may also be synthetic convertibles offered by investment banks.
Do you pay attention to growth potential when choosing stocks?
I am always looking for total return; I wouldn't buy a company for a high yield alone. Looking just at yields is a dangerous game. I have done it a few times over the years and learnt it tends not to pay off.
If you located an exciting growth opportunity without a yield, would you avoid it?
In general, yes. Such a stock is not suitable for my portfolio. If one of my colleagues said they had found a small-cap stock whose share price would go up 10 times, I would say fine, but that's more for the small-cap or growth team, not for me.
How does the research process at your organisation work?
We have a team of 13 global researchers, the majority of which are specialist analysts. But managers such as myself still follow a sector. For example, I still follow UK tobacco stocks.
I have followed the tobacco sector for 24 years. Before I launched this fund I was a research analyst at Clerical Medical and this was one of my sectors.
Across the whole team, we believe in the importance of dividends, even when investing purely for growth. Insight
FUND MANAGER: William Claxton-Smith
William Claxton-Smith has managed the Clerical Medical Equity High Income fund since launch in November 1984 but has been at Clerical Medical for 26 years.
He graduated from Exeter College, Oxford, with a degree in philosophy, politics and economics in 1975.
He takes a particular interest in the governance and regulatory aspects of fund
management and sits on a number of industry committees in this area.
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