During the later stages of Tineke Frikkee's tenure as manager of Newton Higher Income Fund (GB0006779218) performance was not good. So at the end of 2012 she was removed as its manager after it had been in the lowest 25 per cent of the IMA UK Equity Income fund sector over one and three years in terms of total return. Last year she made a fresh start at Smith & Williamson, where she runs the company's UK Equity Income Trust (GB0008178799) and is adamant that she can make this fund perform better.
"I had severe restrictions on the way I ran money at Newton as I could only invest in high-yielding equities," she says. "Very restrictive mandates only do well when that particular style does well, but if you are very flexible you have the potential to do well in all markets and the fund relies more on manager skill."
When Ms Frikkee ran Newton Higher Income she had to buy shares yielding 115 per cent of the market yield and sell them when they fell below the market yield. Smith & Williamson UK Equity Income Trust can buy shares with a forward dividend yield of between 2 and 6 per cent. "Our approach is to balance above-average dividend yields with earnings, cash flow and dividend growth," says Ms Frikkee. "We will aim for an above-average yield premium over the FTSE All-Share and try to grow the fund's dividends in line with retail prices index inflation."
She targets "above-average quality" shares with decent profitability that can self-finance profitable growth, and have good cash flow and balance sheets. "In a market downturn companies with weak balance sheets go down the most because they may need to raise money and face other problems."
She also claims that the smaller size of the fund (£33m) allows her more freedom over investment choice. "The bigger a fund is, the more it has to be in larger companies, but I take a multi-cap approach. This gives more access to growth and I own some companies that have a market capitalisation of less than £300m but still yield 5 per cent," she says. Examples include Braemar Shipping (BMS) with a market capitalisation of £147.39m and a 5.25 per cent yield.
At the end of June, mid caps accounted for 38 per cent of assets and small caps accounted for 9 per cent. With her Newton fund higher growth, mid caps only accounted for 0.25 to 1 per cent of assets, and she was overweight mega caps.
Examples of higher-yielding mid caps in Smith & Williamson UK Equity Income Trust's portfolio include closed life book operator Phoenix (PHNX) which yields 7.8 per cent and is "way too cheap even though it is very stable and offers a good cash flow".
Read our Buy recommendation on Phoenix
Another closed life specialist, small-cap Chesnara (CSN) has a market capitalisation of £359m and yields 5.7 per cent.
Tineke Frikkee CV Tineke Frikkee has been manager of Smith & Williamson UK Equity Income Trust since July 2013. She joined from BNY Mellon where she spent almost 15 years, managing Newton Higher Income Fund between April 2004 and December 2012. She has a degree in health sciences from Zuyd University and an MBA from City Business School. |
The portfolio has around 60 per cent of its assets in areas she describes as cyclicals such as basic materials, consumer cyclicals and financial services.
A difference with her former fund, and other UK equity income funds, is the equal weighting of companies in the portfolio. "I don't top and tail shares," she says. "If a holding reaches its valuation price it is fully sold, and new holdings come in at 2 per cent of assets. I think a share either has upside or it doesn't. If you run a small fund you can get in and out - larger funds can't. I believe I could run this style up to about £1bn."
She tries to maintain the size of each holding at around 2 per cent.
"To be in my fund a company's share price needs to deliver 15 per cent upside or more," she says. "I think about where the stock could trade at and if it is expensive I won't keep it - each share has a price target. People are great at buying but less good at selling. It is good to have a disciplined approach to selling. We spend a lot of time thinking where a stock should trade at, as well as possible entry points."
For the most capital intensive companies, for example, big oil and gas and financial companies, she looks at the price-to-book ratio and models how they have done over a 15-year time period, considering what the range of growth has been, where it is today and where it could get to. With less capital intensive companies she looks more at price earnings to growth.
Exceptions to the price target rule include engineering company Kentz (KENZ). It expanded its footprint in Latin America and the US shale gas market by acquiring oil services group Valerus Field Solutions, and the price target on this was raised to £10. "The company did a transformational deal," she explains.
Over the first six months of this year Kentz made the greatest contribution to the fund's portfolio, increasing 47 per cent, helped by another takeover approach. Read more on this
And if a company changes strategy it might be sold before it reaches its target price. "Catastrophe insurer Lancashire (LRE) had started to look expensive and it then bought another company at what seemed like too high a price," she explains. "Its nimble strategy was diluted so I sold Lancashire in the second half of 2013.
"But mostly it is a case that as time goes on I consider how much more growth can I get from a company."
British Land (BLND), for example, was sold because she felt it had fully priced in 2014 growth.
Recent additions include Vodafone (VOD), as she feels the valuation has become more attractive. "Not all its potential is in the price and it has an emerging markets business with high profitability," she explains. "Developed telecoms markets had too much competition but there are signs of consolidation."
Ms Frikkee keeps a list of companies she likes but cost too much, and buys them when she feels they are cheap enough. Luxury goods company Burberry (BRBY) and Tate & Lyle (TATE) were recently added when their share prices fell.
Over the year she has run the fund it has beaten the FTSE All-Share although it is still behind its sector average. But Ms Frikkee maintains that this is a good start, and points out that it has a yield of more than 4 per cent and has grown about £25m in size.
"Equity income will continue to be interesting because while interest rates will go up, it will probably not be that much, so funds with good dividends will have a role to play," she concludes.
