James Thorneley Murray Equity Income's performance has been improved after the Oeic's manager broade...
Murray Equity Income's performance has been improved after the Oeic's manager broadened out the investment universe.
The £59.2m Oeic is managed by Brian Gallagher who joined Murray Johnstone in July 1999. Until then the portfolio was purely invested in FTSE 350 equities. Now the portfolio has a wider mix of paper from corporate and government debt, providing income to shares in technology companies, which pay out no dividends.
Gallagher aims to achieve a yield target of 25% above the FTSE All-Share index. The change has had a positive effect on the performance of the fund.
The fund is ranked four out of 89 in the Micropal UK Equity Income peer group for the year to 4 April. During the 12 months it rose 4.4% on an offer to bid basis compared to an average fall of 3.8%. Over three years the fund is ranked 23 out of 84 rising by 39.5%, again on an offer to bid basis, while the peer group average rose by 35.5%.
The broadening out of the investment universe is a function of the tough market environment that income funds face, according to Gallagher. Some 30% of companies in the FTSE 100 now have a yield below 0.5%. Gallagher added: "Companies in the FTSE 250 which have high yields usually lack pricing power and have poor fundamentals."
He also pointed out that the abolition of advance corporation tax has encouraged companies to make capital payments rather than provide a dividend. Recently GKN effectively defaulted on its dividend payment, according to Gallagher.
In light of the abolition of ACT an important element of a company's tax planning is to find ways in which value can be released on surplus advance corporation tax paid on past years' dividends. GKN had made surplus ACT payments at the end of 1999 amounting to £35m.
In order to access this surplus, rather than pay a final dividend, GKN issued redeemable 'B' shares to ordinary shareholders on the register on 26 May 2000 with a total nominal value of 11.7p for each ordinary share held.
The total payment a shareholder will receive in respect of 1999 is 18p per share comprising a 6.3p dividend, for 1998 the dividend paid was 16.3p and a 'B' share worth 11.7p if redeemed. By not paying a full final dividend, GKN estimates that up to £12m of ACT previously paid will be recovered.
Gallagher said: "Many companies have unrelieved ACT and this is the path they are going down. Last year Laporte and Anglian Water both effectively defaulted on their dividends. It is not problem for my fund but a lot of income funds can not make any capital payments into their income accounts and so will face further problems if this trend continues."
Even though the fund has exposure to technology stocks at one end of the market spectrum and corporate bonds at the other, Gallagher does not see himself as a barbell manager. He prefers the building block approach. He said: "The engine room of the portfolio, between 90-95%, is invested in equities with the main objective to generate capital growth and some yield pick up. The balance consists of a mixture of corporate bonds, gilts and convertibles."
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