Investors in ABN AMRO's income faced a tough choice last year: keep faith with the growth or transfer to framlington
George Luckraft of Framlington and Adrian Frost of Artemis are both in the premier league of equity income fund managers. Strong competition between the two is inevitable considering the tensions created when Luckraft left for Framlington last year.
Luckraft had built up a strong following while working at ABN Amro, a group that promoted him and his colleague Nigel Thomas as the backbone of its fund range.
Investors were startled when he and Thomas left to join Framlington and ABN was left with the difficult task of attracting quality replacements.
Instead of recruiting, a marriage was made between ABN Amro and Artemis, a move well received by advisers.
Framlington attempted to capitalise on its catch, targeting ABN investors for transfers, by offering a 2% discount on Luckraft's new vehicle. However, due to the quick tie-up with Artemis and the existing strong reputation of Frost, transfers out of the former ABN funds were limited.
Luckraft's former ABN portfolio was merged into Artemis' existing Income fund in February this year. Artemis Income was launched in June 2000 but Frost took over management on 1 January 2001, joining the group from DWS Investments.
The Framlington Equity Income fund has been going since 1980 however, just under one year's track record can be attributed to Luckraft, who joined the group on 9 September last year.
Over the period from 9 September, 2002 to the beginning of August 2003, when both managers were in place with their respective funds, Luckraft's fund is the best performing of the two. It is ranked four out of 75 funds in the UK Equity Income sector, before charges, having returned 14.11%, compared to the sector average of 6.31%. Artemis Income is ranked 21, after posting growth of 7.79% over the same time period, according to Standard & Poor's figures.
The 12-month yields on the two portfolios are, however, almost identical. Artemis is yielding 3.22% and Framlington 3.6%
That said, the Artemis vehicles appears to be paying out more in terms of genuine income.
According to Lipper figures, income earned over 12 months to the end of July, based on a £1,000 investment, would have amounted to £41.70 in the Artemis vehicle versus £14.88 in the Framlington fund. The statistics also show that over that same 12 month period the Artemis fund fell into negative returns three times while the Luckraft's portfolio posted four negative months.
Artemis Income is £406m in size, significantly larger than Framlington Equity Income at £84.3m.
Mark Dampier, head of research at Hargreaves Lansdown, said the larger size of Frost's fund has driven him further up the market cap scale.
Dampier believes the better performance by Luckraft over the past 12 months can partially be attributed to a rally in the smaller cap area of the market.
While Luckraft typically aims to hold around a third of his portfolio in large cap companies, Frost holds closer to 50%.
Frost's prefers diversity within his Artemis Income portfolio, holding some 109 stocks while Luckraft holds a much tighter portfolio of 60 to 70 stocks.
In addition to a more diverse portfolio, Frost is often considered to be a pragmatic manager, not adhering to either growth or value disciplines.
While he is known for his stockpicking abilities, Frost also takes a top down view when constructing his portfolio. This macro overlay either supports his stock picks or leads him to dig deeper into potential holdings.
Frost said: 'I identify candidates for the portfolio on the basis of their free cashflow. That is, the cash left at the end of the year, net of tax, interest payments and after investing enough to sustain the business. This, not earnings per share, is a true measure of the dividend paying ability of the company. 'My simple view is that, armed with this approach, we can build a portfolio that has a higher yield than the overall market and can grow its dividend as fast as the overall market, but over time will do better.'
Research by Forsyth Partners states Luckraft's style is also largely based on stock picking and draws on the manager's experience.
Luckraft, on the flip side, is quite well-known for the growth style in which he manages his funds. Towards the end of the 1990s, Luckraft's performance at ABN Amro lead his fund to top the sector, mainly on the back of his use of growth stocks in conjunction with higher yielding, more traditional income holdings. One of the pioneers of this bar-bell approach, Luckraft has switched in and out of this strategy depending on market conditions.
Through much of the recent bear market Luckraft went back to straight equity income portfolio.
Luckraft believes that because of the difficult market conditions, in particular over the past year, the number of high yielding stocks and those capable of delivering earnings growth trading at attractive prices has increased, diminishing the need for pure growth stocks as a performance kicker.
Following the March equity market rally, however, he has now identified some growth opportunities he wants to bring into the fund. Slowly moving the portfolio back to a barbell structure, pure growth stocks now account for 3.5% of the portfolio.
He said: 'I do not expect the growth component will reach anywhere near its previous maximum of 20%, which occurred during the crazy technology days.'
Dampier said: 'In terms of style, I would say Frost is more analytical where as Luckraft is more seat of the pants. That is not necessarily a criticism ' what I'm saying is that Luckraft uses his contacts a lot more. Also Luckraft is more of a bond manager, so he can look at companies from a slightly different position.
'Frost looks very much at fundamentals such as free cash flows, while Luckraft will look at a number of different things, and just because something may be out of sync with another, it wouldn't necessarily prevent him from buying it.'
'The two funds dovetail well together. We do not have an 'either or', we buy them both.'
Dampier said one of the similarities between the two is that both have excellent teams working around them. Frost works with a group including Mark Tyndall, Derek Stuart and John Dodd. Luckraft meanwhile works alongside former colleague Thomas, plus smaller companies manager Roger Whiteoak and Chris White among others.
Frost also manages the £174.2m Artemis High Income fund, which falls within the UK other bond sector. This vehicle contains 55% corporate bonds in its portfolio.
Luckraft manages the £60m High Income fund in the same sector, containing 47% gilts and bonds and 40% convertible and preference shares. This too falls within the other bond sector.
Another fund managed by Luckraft is the £37m Framlington Monthly Income fund.
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