UK equity income fund managers Chris Murphy and James Balfour describe their investment process and philosophy.
The Aviva Investors UK Listed Equity Income Fund aims to deliver an income return of 110 per cent of the income return of the FTSE® All Share Index, annualised, over three-year rolling periods, while also aiming to grow your investment over the long term (five years or more) by investing in shares of UK companies.
The fund is actively managed by Chris Murphy and James Balfour who run a high-conviction portfolio of stocks capable of generating higher levels of income and growing their dividends over the long term.
The portfolio aims to invest in companies with high barriers to entry – focused on future cash flow, cash compounders and recovery stocks – meaning the fund should be naturally more resilient, and exhibit lower levels of volatility versus its peers.
ESG is also integrated across the investment process, and the team actively engages with every company to help create change and enhance returns.
Figure 1: Fund performance: Ten years vs. FTSE All Share
Sector breakdown versus benchmark
While Murphy and Balfour aim to build a diversified portfolio of UK listed companies, they do not consider a company’s weight within the index when investing. Instead, they focus on identifying strong and steady businesses that can generate high levels of income.
This often results in the portfolio deviating from the benchmark, both in terms of sector and stock weighting levels, as can be seen in Figures 2 and 3.
Figure 2: Active sector weights
Figure 3: Top ten active sector weights
How does the Aviva Investors UK Listed Equity Income Fund stand out?
Murphy and Balfour's consistent investment approach aims to look through ongoing market noise, as well as the fear and greed that can often drives investor behaviour. This avoids ‘herd chasing’ and allows core, change-led investment opportunities, backed by robust fundamental analysis, to be identified. Stock selection is focused on three silos based on company cash flow, as seen in Figure 4.
Figure 4: Stock selection approach
The investment strategy benefits from both scale and dynamism. While the UK Listed Equity Income Fund is itself relatively nimble, at around £950m, the broader global active equity team manages £36.1bn.
This experienced team of over 40 equity investment professionals shares a common investment language, philosophy and process across both geographic regions and industry sectors, facilitating effective connected thinking.
This is enhanced by high levels of direct company access and seamless information flows from GRI (Global Responsible Investment), credit and multi-asset & macro teams, as well as support, oversight and challenge from our independent investment risk team. This overall framework enhances idea generation and helps optimise portfolio construction.
Consistent performance profile
Murphy and Balfour assess and analyse companies consistently, from a broad idea set (see Figure 5). This has seen the fund consistently outperform the index over the past ten years (see Figure 1). Its distributions paid out have grown by 70 per cent since portfolio manager inception.1