Nevertheless, we think shareholders should follow the lead of this fund’s manager Tineke Frikkee. She continues to stick to a strategy that has produced solid results over the long term. We admire Frikkee’s discipline, and we think the fund’s strategy (which predates Frikkee’s tenure on the fund) is a sensible one that is likely to withstand the test of time. It emphasises stocks with attractive valuations and healthy free cash flow yields that can help underpin future dividend pa
youts. Indeed, given the fund’s income mandate, dividends are front and centre here. Frikkee only considers buying a stock if it generates a yield that is at least 15% higher than the yield of the FTSE All Share Index. By the same token, a holding becomes a candidate for sale if its yield drops below the index’s. The strategy has paid off thus far from an income perspective. The fund’s most recent twelve month yield was 5.76% compared to its average Morningstar UK Large Cap Value equity peer yield of 4.56% and its average IMA Equity Income peer yield of 4.77%.
However, we think Frikkee’s search for high-yielding stocks will be trickier going forward. The financial services sector previously offered attractive yields but in light of the banks’ exposure to the US sub-prime crisis, their ability to pay dividends has become questionable. Frikkee drastically reduced the fund’s financial exposure by 15 percentage points between April 2007 and March 2008. Many banks are off limits until they gain some stability even though valuations may look cheap. Also, the robustness of the cash flows of mid-cap companies has also come into question due to the scarcity of cheap finance, so Frikkee has reduced the fund’s exposure. The mid-cap stake has fallen by 12 percentage points since mid 2007.
Lately, Frikkee has been focusing more on giant cap stocks, such as BP and Vodafone, as she believes their relatively stable but diverse revenue streams puts them in good stead to pay dividends. Frikkee has also been making heftier bets where she believes companies have pricing power, such as British American Tobacco, to counteract inflationary pressures, which should help them maintain their dividend payouts.
We think this more defensive stance should help protect the fund’s income payout during these uncertain economic times. We also continue to have faith in this fund’s long-term potential. Although its strategy has fallen out of favour in recent times as growth stories, particularly mining stocks, have been leading the way, there has been no temptation to change the fund’s yield criteria in order to boost capital growth.
We continue to like this fund for its consistent approach and think it is a strong choice for income-oriented investors.
