Diversify your income with MI Chelverton UK Equity Income

Another option is to seek income from parts of the UK market other than mega-caps, such as medium-sized and smaller companies. A good way to do this could be MI Chelverton UK Equity Income Fund (GB00B1FD6467), which invests in predominantly mid-caps. When selecting shares, the fund’s managers screen all UK small and mid-caps with a market cap above £50m on a regular basis. At the end of April, 29.18 per cent of the fund's assets were in 25 companies with a market cap of between £500m and £1bn, and 30.47 per cent were in 25 companies with a market cap above £1bn. Investing in mid-caps differentiates this fund from a number of its UK equity income peers, but without excessive risk, as these types of shares are listed on the main market and still reasonably easy to trade.

MI Chelverton UK Equity Income aims to deliver a high and growing quarterly dividend, and good long-term capital growth, and has succeeded in this aim. It has a very attractive yield of 5 per cent and over five years has made a total return of 38.8 per cent, ahead of the FTSE All-Share index’s 32.1 per cent and the Investment Association (IA) UK Equity Income sector average of 26.2 per cent, putting it among the top 10 best performing of these funds over this period.

The fund’s managers, David Horner and David Taylor, both have over 20 years’ experience of investing in smaller companies. They invest in companies that generate cash on a sustainable basis, which is used to grow the business and reward shareholders. They only initially invest in companies if they yield at least 4 per cent on a 12-month view and add to them until the yield falls to 3 per cent. When a company’s yield falls to 2 per cent they sell it if they have not already done so, as is often the case.

The fund’s managers analyse prospective investments' balance sheets to ensure that companies do not have too much debt and the working capital requirements are not too onerous, and they examine sales growth and margins to measure likely dividend growth. They like companies where the managers strike an appropriate balance between current and future income.

MI Chelverton UK Equity Income also invests in smaller companies, and 21.71 per cent of its assets were in companies with a market cap between £250m and £500m at the end of April, and 12.59 per cent were in companies with a market cap between £100m and £250m. This means it is higher risk than funds focused on larger companies because smaller company shares may be less easy to trade than those of the former, and their performance can be more volatile over short periods.

The fund can also invest in companies listed on the Alternative Investment Market (Aim), which carry these risks and are less regulated. As a result, the fund’s performance has been volatile. For example, it made a total return of 24.25 per cent in 2017 but fell 14.19 per cent in 2018. This means its short-term performance numbers do not look good. Smaller companies are also more exposed to the domestic economy so could do badly if the UK leaves the European Union.

However, the fund does not only invest in smaller companies – around 60 per cent of its assets are in mid and large-caps. And although in some years it has made negative returns, or underperformed its peers and broad indices, it has always bounced back, so its long-term total returns are good. So far this year, the fund is up 10.13 per cent, not far behind the FTSE All-Share index and in line with its sector average.

So if you are looking for differentiated equity income exposure, and have a long-term investment horizon and a high enough risk appetite to have exposure to smaller companies, MI Chelverton UK Equity Income Fund looks like a good option. Buy. 

MI Chelverton UK Equity Income

Source: Morningstar as at 12 June, *Chelverton Asset Management

Performance

Source: FE Analytics as at 10 June 2019

Top 10 holdings (%)

Source: Chelverton Asset Management as at 30 April 2019

Sector breakdown (%)

Source: Morningstar as at 30 April 2019