.co.uk/UK/fundscreener/results.aspx?lang=en-GB&Category=EUCA000552&Universe=FOGBR%24%24ALL">UK Large-Cap Value
category thereafter. The RBS Equity Income fund fared very favourably when McKenzie was on board, while the Norwich Distribution fund slightly trailed its peers in the Sterling Cautious Balanced category.At this fund, McKenzie keeps to a consistent contrarian approach, seeking out-of-favour companies with above average dividend yields or high dividend growth rates. In more downcast markets, the prices of depressed stocks lead to higher dividend yields, making such names more attractive. Conversely, when markets are up McKenzie may be more apt to emphasise dividend growth. Nevertheless, the portfolio typically has a strong value cast, and its current forward P/E of 10.61--about 15% below the category norm--reflects that.
McKenzie's strategy drives the portfolio's bias to the income-rich financials sector; typical of most high-yield stock strategies. Financials account for 31% of the fund's equity holdings -- in fact a fifth higher than the IMA Equity Income sector average -- and soaked-up an even larger share in the summer when the sector began to tank. On the growth side, he shaded the fund lightly towards the commodities and energy sectors and kept relatively sizeable weightings in stocks lower down the market-cap scale.
Shortly after McKenzie took charge, the fund began to show signs of strength. In 2006, for instance, the fund returned 20.4%, ranking in the category’s top quartile. However, its large financials weighting and willingness to dip down the cap ladder hurt it late in 2007 as the credit crunch led investors to shun financials and the perceived risks in the mid- and small-cap arena. The performance was also damaged earlier in the year by HMV. All told, the fund lagged the Morningstar UK Large-Cap Value category average by five percentage points last year.
Nevertheless, we aren't that concerned by a single poor year. First, we believe the fund is stronger than it was prior to McKenzie's arrival. Second, buying cheap stocks requires patience, and one bad year is no reason to write off the approach. Indeed, such strategies will often have clusters of underperforming years when the market runs against their style and investors need to be prepared for this. There are also bigger-picture factors that should work in the fund's favour. McKenzie can draw on Martin Currie's team of career analysts. The group has an average tenure that is north of ten years and top performers can earn as much as portfolio managers. In our experience, that type of pay structure helps firms build depth and experience that can pay off in stronger research. McKenzie's lower turnover style--which should help limit trading costs--will also work in the fund's favour over time.
Even so, the signals regarding McKenzie's ability to execute the strategy effectively are mixed at this point. Given its structural advantages, we think the fund has a shot at being good, but McKenzie needs to show more of what he can do to make this a strong choice.
