max schlaeffi-managed fund is worst performing vehicle in uk equity income sector, falling 61.25% over 12 months against average of -23.77%
The UK Equity Income sector has had a torrid time over the last 12 months, with not one of its 80 funds generating a positive return during the period.
Over the year to the end of February, the average fund has posted a return of -23.77%, while over three years to the end of February the sector average is -15.88%.
The top two performing funds in the sector over three years have been Bill Mott's Credit Suisse Income and Carl Stick's Rathbone Income.
While Mott's fund is down 21.01% over 12 months to the end of February 2003, it is up 20.31% over three years, outperforming the sector average by 35.69 percentage points.
Similarly, Stick's fund is down 16.57% over one year, but has outperformed the sector by 34.17% over three years, posting growth of 18.79%.
While Mott's fund has achieved this significant outperformance on a slightly higher beta than the sector average of 1.02, Stick has done so on a lower beta than that of the sector.
Mott's fund achieved an annualised alpha of 14.73% but did so with a beta of 1.17%, while the alpha on Stick's fund was 12.98% with a beta of 0.95.
Exeter High Income was the worst performing fund over one and three years, primarily due to an investment policy which states that the bulk of the fund's assets must be invested in the income shares of split capital investment trusts. As a result of this, over one year the fund is down 61.25% and over three years it has fallen 71.88%.
In June last year, Max Schlaeffi, who joined from Christows, took over the running of the Exeter fund from Chris Giles and went about making a number of changes to the portfolio in an attempt to improve its performance.
Schlaeffi said: 'The fund was underperforming so much because it was illiquid and contained too much risk. The priority to start with was to raise cash and go about reducing the risk.'
However with most of the fund invested in splits, Schlaeffi said selling holdings and raising cash was difficult because liquidity in the sector was so poor. In the first two months of running the fund he said he couldn't trade at all, and between 1 June to 14 September the portfolio went down every day but two.
By October 2002 Schlaeffi was able to get the cash level up to a 22% weighting in the fund, of which he invested two-thirds into short-dated gilts. Schlaeffi has also been improving the quality of the fund by investing in blue chip UK equities such as HBoS, Kingfisher, M&S and Severn Trent.
He said: 'We took a decision to allow the fund to increase its UK equity exposure to 15% and have written to unitholders to get their views on increasing this equity exposure even further. At the moment the fund is too splits-orientated. I would like the freedom to change the asset allocation significantly and go to 50% in equities.' Schlaeffi added there are still a number of high quality splits available in the market which have been oversold and are looking cheap.
Of the 75% of splits he runs in the portfolio, Schlaeffi said that one-third are the higher-quality splits he prefers, such as the Jupiter Split Trust and Jupiter Enhanced Income.
He said: 'Splits will be under a cloud for a long time, yet I still want 40%-50% invested in them if the changes on the fund get voted through. I also own some of the higher quality zeros as they can help unitholders recover some of their lost capital.'
However, Schlaeffi said there is still 20% of the portfolio that he wants to shed but cannot for liquidity reasons. He said it might take anywhere between 12-18 months to sell these, most of which are the highly geared splits.
One fund that has posted positive three-year performance is Humphrey van der Klugt's Schroder Income fund.
Van der Klugt took over the fund from Ian McVeigh in February 2002 and while over the 12 months to the end of February it has fallen 19.33%, it is up 5.26% over three years.
Van der Klugt attributed the fund's outperformance of the sector over both time periods to the stock-picking approach employed, which emphasises strong companies where the dividend is perceived to be secure and there is some scope for dividend growth over the medium term.
In August last year he sold down a tail of small holdings in the portfolio after the market rallied for a period, as it gave him some cash and extra flexibility.
Since taking over the fund last year Van der Klugt has reduced the number of stocks in the portfolio from around 120 to 85 and is currently running a cash position of 6%.
At the margin, Van der Klugt said he has begun increasing the beta of the fund's portfolio, with the purchase of two small holdings in life companies Prudential and Legal & General at the start of March, after previously not holding any life companies in the portfolio.
As at the end of February this year the beta on the Schroder Income was 0.98 compared to the sector average beta of 1.02, yet despite being lower risk its annualised alpha stood at 8.41 compared to the sector average 1.15.
He said: 'You do not have to move down the quality scale to find attractive companies. I am buying quality stocks that should respond well when the economic environment improves.'
The nominal yield on the FTSE All-Share has been between 4%-6% over the past 100 years.
After falling to 2% during the TMT boom, he said the yield on the All-Share is now up to around 4%, coming back into line with the historical average.
Van der Klugt added: 'The encouraging aspect is that the valuation basis is now getting re-established for equities, however with the nominal yield only just getting back into this historical range it is not a reason to get carried away.'
Spent 56 years at Schroders
Warns on profits
Hargreave Hale seeking legal advice
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