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Solid choice for income seekers

FUND TIP: The Artemis Income fund offers a good yield from UK defensive equity investments
February 12, 2009

Rewards:

■ High historic yield

■ Good manager track record

■ Low weighting in banks

■ Some overseas diversification

Risks:

■ UK focus

■ No analyst support

IC TIP: Buy at 130p

As income from cash hits rock bottom, income seekers who are looking for alternative sources of income, will quickly find themselves in the UK equity income fund sector, a lower risk starting point for anyone wanting to dip their toes into equities. Here the Artemis Income Fund stands head and shoulders above the rest, seemingly on every independent financial adviser's recommended list.

The fund was launched in June 2000 and is managed by Adrian Frost, who is widely regarded as one of the more successful managers in the UK income sector. Mr Frost took over the management reigns of Artemis Income from Derek Stuart in January 2002 and was later joined by Adrian Gosden, who stepped in as co-fund manager in October 2003.

The duo has set out to achieve a rising income combined with capital growth from a portfolio primarily made up of investments in the UK. The aim is to achieve a yield in excess of the FTSE All-Share Index, through an exposure to ordinary shares, preference shares, convertibles and fixed interest securities.

The approach seems to be working, considering Artemis Income’s historic yield of 6 per cent. While the fund returned -18 per cent in the last year, it did perform substantially better than its benchmark and has managed to outperform the sector average by 21 per cent during the past five years.

Artemis is not supported by analysts and the two managers, who between them share more than 30 years' experience of managing higher income mandates, are reliant entirely on their own work, third party research and Smart GARP, Artemis’proprietary stock picking model, to steer fund picks.

Cash flow is at the heart of the fund's strategy, with the two Adrians putting their time towards finding companies which boast attractive cash flow yields relative to their respective government's 10-year bonds.

Last year the two managers responded to changing market conditions by selling Deutsche Post and reducing investments in RWE, the German electric power and natural gas public utility company in favour of buying more Scottish & Southern in lieu. The managers also bought Draz, the FTSE 100 Index listed company that owns the Drax power station, having sold it much higher up earlier in the year.

Andy Gadd, head of research at IFA the Lighthouse Group, says investors looking for income will be attracted by the fund's high historic yield and given the reductions in interest rates, investing in the fund could provide an attractive yield going forward. He says: "The fund only has 5.3 per cent of its total asset allocation invested in banks stocks which, given past events, is a very good thing."

Many equity income funds struggled as the problems in the banking sector became increasingly apparent. Historically, banks have been a dividend mainstay for many income funds and the trend of dividend reductions and cancellations has weighed heavily on certain funds. 

Mr Gadd also points out that a large portion of the fund is invested in solid, dependable companies - sectors such as oil, gas, utilities and pharmaceuticals. "All concrete, defensive stocks with which to weather the recession," he says.

Last year, Mr Frost made some modest purchases of consumer stocks via Whitbread and Tui Travel, but such purchases are likely to stay modest. "There are some opportunities in consumer stocks now and then, but our 10-year view is that the UK consumer is going to be taxed out of existence and strategically it does not make sense to have a big position in consumer stocks," says Mr Frost.

While sector requirements dictate that the Artemis Income Fund has to have 80 per cent of its investments in the UK, Mr Frost does not view this as a risk. "If you look at where the dividends come from, very few of them actually come from UK economy dependant businesses," he says. "Most of the dividends in the FTSE 100 come from dollar earners, oil companies and large companies which only have a small amount of their business in the UK. The correlation of these players with the UK economy is not strong, which is a good thing."

Justin Oliver and Mark Piper, co-managers of the Collins Stewart Select Funds, have the fund on their buy list. "The fund has consistently ranked highly against its peers and Mr Gosden and Mr Frost have navigated the last 12 months extremely well," they say. "The managers also have the added ability to invest a portion of the fund in European equities, when similar stock or sector opportunities are not available in the UK stock market. We believe that this flexibility will prove to be extremely beneficial in 2009, as valuations and earnings expectations for European stocks are low on a relative basis and investors are very underweight the region."

Mr Frost's prediction is that a lot of investors will become increasingly aware that they are in low return, no return assets and will rediscover their risk appetite for equities. "And I think equity income is probably at the low risk end of the equity spectrum," he adds.

See a full factsheet for this fund, including a PDF download, in our fund data centre.

Artemis Income Fund
PRICE130p3 YEAR SHARPE RATIO-0.6
SIZE OF FUND£2150.92m1 YEAR PERFORMANCE-18.4%
No OF HOLDINGS773 YEAR PERFORMANCE-12.7%
SET UP DATE06-Jun-005 YEAR PERFORMANCE27.9%
MANAGER START DATE01-Jan-02TOTAL EXPENSE RATIO1.56%
TURNOVERn/aYIELD7.04%
VOLATILITY3.03MINIMUM INVESTMENT£1,000
TRACKING ERROR1.97MORE DETAILS0800 092 2051

Source: Morningstar

Top 10 holdings:

Artemis Income Fund
Royal Dutch Shell 'B'6.44%
BP5.77%
GlaxoSmithKline5.41%
AstraZeneca5.13%
Vodafone5.08%
Centrica3.81%
Scottish & Southern Energy3.48%
HSBC3.41%
Koninklijke KPN3.26%
RSA Insurance Group PLC2.52%