Is The UK Market Overvalued?

P/E ratio

A common metric for valuing shares is the PE ratio, this compares a company’s share price with its earnings. And in this case, taking an average for the whole stock market.

The FTSE 100 PE ratio presently stands at 15, and the FTSE 350 (an aggregation of the FTSE 100 & FTSE 250) trades on 16 times earnings, matching its long-term average. To put this in perspective, the UK stock market traded at more than 25 times earnings during the dotcom bubble (A speculative bubble in internet-based companies covering 1996–2000).

Source: ftse.co.uk

A more refined version of the PE ratio is the cyclically adjusted price to earnings ratio (CAPE), which smoothes earnings over the course of the business cycle, places the FTSE 100 on 13.5. This is again below its long-term average of 16.

However the cyclical adjusted price-earnings ratio (also known as Shiller price-earnings ratio) is by no means perfect, according to the financial economist and Reuters journalist Anatole Kaletsky. He correctly highlights that…

“Any comparison of valuations covering long periods is meaningless if it fails to take into account vast changes in technology, economic policies, interest rates, social and political structures, and taxes”.

Anatole explains that investors who followed Shiller’s methodology would have missed out on all of the gains within the last 25 years.

The Shiller price-earning ratio showed the stock market to be overvalued 97 percent of the time during these 25 years. Even during the two brief periods when the Shiller ratio was below its long-term average — in early 1990 and from November 2008 to April 200 — it never sent a clear buy signal. Instead, Shiller’s approach suggested that the valuations in 1990 and 2009 were only just below fair value — implying there was very limited upside at the beginning of two great bull markets that saw prices multiply fivefold from 1990 to 2000, and threefold from 2009 to 2014 (so far).

Therefore I would take this statistic with a pinch of salt.

Monetary Policy and Relative valuation

Monetary Policy remains very accommodative, both in Europe and across the Atlantic.

The Bank of England base rate is 0.5% and the European Central bank base rate stands at 0.05%. The Bank of England governor Mark Carney has suggested that a return of rates to the normal 5% remains unlikely in the medium term. In addition, he said that rate rises would be more limited and gradual than in the past and expects them to reach a new normal of 2.5%.

This translates into negative real interest on cash (where inflation exceeds nominal interest rates) and meagre gains on government and corporate bonds. Therefore on a relative basis, equities look attractive.

Elsewhere, inflation remains subdued and economic growth continues to pick up speed – this is good news for corporate profits. Earnings is one of two key drivers of share prices over the long-term, the other being the attractiveness of alterative asset classes.

Yield Gap

The yield gap is a common yardstick to assess whether a market is over or under valued. It is the average dividend yield in a market compared with the yield of a long-term government bond.

In this case, the FTSE 100 yields 3.4% and the FTSE 350 (aggregation of FTSE 100 and FTSE 200) yields 3.3%. By comparison the 10 year gilt year is 2.64%, this would imply that shares are undervalued. However critics would rightly point out that this method is distorted by quantitative easing and low interest rates.

Market sentiment

Finally, there is the ‘sentiment indicator’. FT investment writer John Auther’s rightly stated, “Bears need to capitulate, journalists need to stop writing articles about corrections and sentiment surveys need to grow unequivocally bullish. This is not happening yet, as this column indicates. This rally continues to be hated and distrusted, and retail investors continue to be heavily in cash”.

It reminds me of the old stockmarket maxim, ‘stockmarkets climb a wall of worry’.

This leads me to the conclusion that while the UK and developed markets are richly valued, they are not a bubble. If anything, I believe there’s a ‘bubble in the prediction of bubbles’ and many journalists make a comfortable living out of it!.

Glossary

CAPE (or Shiller PE): The ‘cyclically adjusted price to earnings’ ratio is calculated by taking an average of earnings per share (EPS) over 10 years and dividing it by the current level of the stock market.

Interesting reads

Anatole Kaletsky – “Time for a ‘melt-up’: the coming global boom” November 14, 2014

Anatole Kaletsky - ‘Here’s what it will take to trigger the next stock market correction’ August 21, 2014

Anatole Kaletsky - ‘Exuberance is not always irrational’ July 25, 2014

Jeremy Siegel – “Don’t put faith in Cape crusaders” August 19, 2013

Key Financial Terms Defined

The business media is awash with financial jargon, perpetuating the myth that the stockmarket is hideously complex and therefore best left to the professionals.

Instead, successful investing requires a basic understanding of the financial markets and the application of core investment principles.

Stock Market Terminology

What is a Share? Also known as ‘Equities’ or ‘Stocks’, they represent part-ownership of a company. As a shareholder, you have a right to say in the decision making (through annual meetings) and are entitled to a share of the profits through the payments of dividends.

Board of Directors – A group of elected or appointed members who run the day-to-day affairs of that company. They are elected by the shareholders to represent their interest.

Initial Public Offering – When a company raises money by issuing shares to the public for the first time. Also referred to as ‘Flotation’ or ‘coming to the market’.

Rights Issue – When a company issues new shares to existing shareholders in order to raise money.

Market Makers – Individuals or stock brokers who guarantee to buy and sell shares in a particular company, in order to maintain liquidity. They create markets in illiquid shares, ensuring there’s always a buyer and seller.

Bid-ask spread – This is the difference between the purchase price and the sales price, it is maintained by the market maker.

Liquidity – The number of buyers and sellers in a particular market. It impacts the degree to which an asset can be sold quickly and easily, with little or no change in asset value. Property is an example of an illiquid asset.

The Big Bang (October 27, 1986) - The day in which the London Stock Market was deregulated. Changes included a shift from open outcry to an electronic system and the abolition of fixed commissions.

Short-Selling – The practise of betting that a share price will decrease. It is the act of selling a borrowed asset with the intention of buying it back at a lower price and returning it back to the owner, pocketing the difference.

Moral Hazard – The incentive to take greater risks, because someone else will bear the costs if things turn badly.

Securities – The general name given to shares, bonds and similar investments that are often traded on the stock exchange

Blue chips – These are large, nationally recognized and well-established businesses. Examples include Royal Dutch Shell and Vodafone Group.

FTSE 100 – An index composed of the 100 largest companies listed on the LSE (London Stock Exchange). It measures the value of the top 100 companies and acts as a barometer of the British economy. Although most of the FTSE 100’s revenue are now derived internationally (more than 70%).

AIM (Alternative Investment Market) - It’s the London Stock Exchange’s market for small, high-growth companies wishing to raise finance without the onerous regulations of the main market.

S & P 500 - The Standard and Poor 500 is a stockmarket index made up of 500 of the largest and most widely held companies on the NYSE (New York Stock Exchange).

Both the FTSE 100 and S & P 500 are weighted by the market capitalization of each stock, meaning larger companies account for a greater portion of the index.

Bear Market – A prolonged period of declining asset prices, fuelled by investor pessimism and lack of confidence. It is characterised by stockmarket declines of 20% or more. Stock market corrections are historical norms, they happen roughly once a year in the 10% range and two to three times a decade within the 20% range.

By contrast, bull markets occur when financial markets have appreciated by at least 20%.

J.P. Morgan table of Bear and Bull markets.

Beta - This measures the sensitivity of a stock’s price relative to the overall market. If a stock has a beta of 1, it indicates a level of volatility equal to the stock market.

Volatility - Indicates the speed and amount by which an investment changes in value. For example established blue-chip stocks tend to have a stable prices, making them less volatility.

Core Tier 1 capital - A measure of a bank’s financial strength. This consists of shareholder equity (capital directly invested by shareholders) and retained earnings (profits not paid out as dividends).

Opportunity cost – Defined by investopedia as “What a person sacrifices when they choose one option over another”. In other words, it’s the benefits you could have received by taking an alternative action

Example – The opportunity cost of going to university is the money you could have earned from working instead.

Financial Conduct Authority (FCA)

The body which regulates the financial services industry within the UK. Their aim is to protect consumers, ensure the industry remains stable and promote healthy competition.

Financial Services Compensation Scheme (FSCS)

The FSCS is the UK’s compensation fund of last resort for customers of authorised financial services firms. They pay compensation if a firm has stopped trading or being declared default.

The scheme protect depositors up to £85,000 per person, per firm and awards up to £50,000 for customers of investment businesses.

About FSCS: http://www.fscs.org.uk/protected

Peer-To-Peer Lending (also known as Crowd-Funding)

It is the practise of financing a business venture, by raising small amounts of money from a large number of people. This is done through internet platforms such as Zopa, Ratesetter and Funding Circle, which bring together borrowers and lenders. As a caveat, Peer-to-peer lending is not covered by the financial services compensation scheme.

What is Bitcoin?

Bitcoin is a digital currency which allows individuals to buy goods and services, without the need of third parties (i.e. banks). The users can store and send bitcoins via a ‘bitcoin wallet’, which is stored on your mobile or computer device. And details of every single transaction are stored on a ‘block chain’, a public record of all financial transactions.

Drawbacks –

Each transaction is completely anonymous, there are fears this will fuel illegal operations (drugs and firearms).

In addition, the supposedly clever design feature means there will only ever be 21 million bitcoins in circulation. This finite supply has turned bitcoin into a speculative investment, rather than a means of payment.

Ben Dyson from Positive Money on the ‘Three Fatal Flaws of Bitcoin’.

A short Bitcoin video: All the Facts

Financial Statements

Income Statement

Also known as the ‘Profit and Loss’ account, it shows the revenues less expenses over a given period.

Balance Sheet

This summarises the assets and liabilities of a business at a particular point in time – financial year end. Assets could include cash, property or machinery. And liabilities include everything the company owes.

Cash flow

This records the cash entering and leaving the company. A key difference between the income and balance sheet is that it doesn’t include the amount of future incoming and outgoing cash that has been recorded on credit (arrangement to pay later).

Investment Management Terminology

Actively Managed Funds – The investment manager will actively try to beat the market by using his judgement, experience and forecasts in making investment decisions.

Passive Funds - A fund which mimics the market index, rather than trying to beat it.

Closet-Index funds – An investment fund which more or less tracks a benchmark, although it claims to be actively managed. Closet indexing exists because fund managers believe it is safer to track benchmark indices.

Hedge Fund – A pooled investment vehicle available to wealthy and sophisticated investors. They are aggressively managed, and use leverage (borrowed money), derivatives, longs and shorts to generate superior returns.

Exchange Traded Funds – Investment funds traded on stock exchanges, which track the performance of a particular market or index such as the FTSE 100.

Options - A contract which gives the buyer the right, but not the obligation to buy or sell the underlying asset, at a specified price on or before a certain date. This is a type of derivative, and they are used to speculate and hedge risk.

Financial Instability Hypothesis - American economist Hyman Minksy believed that ‘Stability begets instability’. This is because long periods of economic stability encourages financial institutions and firms to become complacent. As a result they take on greater risks and more leverage – sowing the seeds of the next crisis.

Minksy Moment - The moment when the financial system moves from stability to instability. Over-indebted borrowers begin to sell assets in order to meet debt repayments, triggering sharp falls in asset values and a loss of confidence. At this point, the whole house of cards falls down.

Most of these terms are articulated through Investopedia’s short animated videos – http://www.investopedia.com/video/

Investment Education – Financial Metrics

What is Earnings Per Share?

Equation: net profit divided by the number of ordinary shares in issue.

It represents the portion of profit allocated to each outstanding share.

It allows investors to observe the growth in profits for each share held.

Diluted EPS expands on basic EPS by including the shares of convertibles or warrants in the number of shares outstanding.

What is Price to Earnings Ratio?

Equation: share price divided by the earnings per share.

The P/E ratio represents the number of years it will take for the earnings of a company to cover its share price. Essentially, it is how much investors are willing to pay for £1 of earnings.

A high PE ratio means the investors are bullish on the company prospects and expect it to perform well.

Conversely a low ratio means that investors aren’t expecting much growth, it might indicate an undervalued company.

It’s not an absolute measure and is best used when comparing companies within the same sector.

Investopedia’s animated video explaining what a P/E ratio is.

The Cyclically adjusted price to earnings ratio (CAPE)

Whereas a PE ratio is the share price compared to one year’s earnings, the CAPE (or Shiller PE) is an average of ten years earnings compared with the latest price.

The purpose is to smooth out fluctuations within the business cycle rather than base it on a snapshot, which is what the conventional PE multiple does.

What is the PEG (Price to Earnings Growth) ratio?

Equation for PEG ratio: price to earnings divided by the growth rate of a company.

It’s the price earnings to growth ratio. It is used to gauge to relative value of a stock versus the company’s growth rate.

It is P/E ratio in the context of the company’s growth rate for the year ahead. Because it takes into account growth rate; it is favored by many over the P/E ratio.

A PEG of 1 indicates the company is fairly valued, a PEG of below 1 means a company is priced below its expected growth rate and indicates an undervalued company, above 1 indicates an overvalued company.

With PEG ratio, the numbers are projected and can be less accurate.

Investopedia’s animated video on the PEG ratio.

Price to Book ratio

Equation: Current stock price / (Assets – Liabilities).

It compares a stock’s market value to its book value.

It shows what shareholders will get after the company is sold and all its debts are paid off.

Low P/B Ratio could mean stock is undervalued.

Investopedia’s animated video on the P/B ratio.

Price to Sales

Equation: Current share price / Sales revenue per share (trailing 12months)

The lower the P/S the better the value, its more useful when comparing similar companies.  Advantages being that sales is harder to manipulate than earnings.

However this valuation metric is less useful for service companies like banks/insurers which don’t really have sales.

This ratio should not be used in isolation.

Free Cash Flow

Equation: FCF = Operating Cash Flow – Capital Expenditures

FCF is a measure of how much cash a business generates, after accounting for capital expenditures (money spent to maintain or acquire land, buildings or equipment). This cash can be used for dividends, expansion or reducing debt.

Operating cash flow is EBIT (earnings before interest and taxes) + Depreciation – Taxes. EBIT is also known as operating income.

Price to Free Cash Flow

Equation: Market capitalization divided by free cash flow.

A valuation metric which compares a company’s market price to its level of annual free cash flow.

Profitability Ratios

Return on Capital Employed (ROCE)

Equation: Earnings Before Interest and Tax (EBIT) / Capital Employed (Total Assets – Current Liabilities).

This ratio indicates the efficiency and profitability of a company’s capital investments.

A higher ROCE indicates an efficient use of capital. It should always be higher than the cost of borrowing, otherwise the company won’t be generating shareholder value.

Investopedia’s short animated video on – ‘Return On Capital Employed’ - http://www.investopedia.com/video/play/return-capital-employed-roce/

ROCE is very similar to ‘Return on Equity (ROE)’.

Return on Equity (ROE)

Return on Equity = Net Income/Shareholder’s Equity (Total assets – Total Liabilities)

ROE measures how much profit a company generates with the money shareholders have invested.

Essentially, as a shareholder how much bang for the buck are you getting?

Net Profit Margin

Profit Margin = Net Profit/Total Revenue

It represents the percentage of total revenue that a company keeps as profit. The higher the profit accrued from the sales of products or services, the greater its efficiency and profitability.

Profile of Terry Smith – Financier and businessman

- Formerly the chief executive of Tullet Prebon, one of the world’s largest interdealer brokers (a financial intermediary that facilitate transactions between dealers).

– Founder and CEO of the fund management business ‘Fundsmith’. At present ‘Fundsmith Equity Fund’ is its principal and sole investment vehicle. At launch he invested a whopping £25m of his own money, it is currently worth over £42m today – He eats his own cooking.

– Also runs a blog called ‘Terry Smith straight talking’ and is a frequent media contributor.

The New Warren Buffet

He established Fundsmith in response to excessive fees and poor performance within the investment management industry. In his own words, he wanted to give “fat and complacent” fund managers a bloody noise. Today the performance of Fundsmith has been exemplary; appreciating by more than 60% since inception (November 2010).

Terry’s investment style:

He’s a long-term, buy and hold investor. He laments fund managers for being too active, because unnecessary trading damages performance and raises management costs (difference between the bid-offer spread and commission). Renowned investor Warren Buffet eloquently said that “Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases”.

Avoids over diversification, they highlight research which shows that around 20 to 30 stocks are required for optimal diversification. The more stocks you own, the less you know about each one – its called ‘diworsification’. As Warren Buffett said: ‘Wide diversification is only required when investors do not understand what they are doing’. Terry Smith article on why ‘Too many stocks can spoil a portfolio’.

Invests in resilient businesses; they avoid industries that are subject to technological innovation. New technologies create value for some investors while destroying value for many others. Example: internet destroying the media industry. Moreover he will invest in good quality business only when the valuation is attractive.

Invests in businesses with a sustainable high return on capital employed (this measures the efficiency and profitability of a company’s invested capital). Companies that typically fit this bill are non-cyclical consumer businesses (food and toiletries) with repeat purchases.

Buys companies with ‘intangible assets’ that are difficult to replicate. By this he’s referring to brands, licenses, patents, dominant market shares etc.

Avoids market timing, studies show that the most successful fund managers avoid market timing. Stocks are a ‘giffen good’, this means that demand paradoxically rises as prices increase. Driven by greed and fear, most investors end up buying high and selling low.

Avoid companies that require leverage – They only invest in companies that generate high returns on invested capital on an unleveraged basis. This is why they won’t invest in companies which require borrowed money to function or survive –  such as banks.

Terry and his investment team are ‘global investors’. With a global perspective the fund is able to ‘contrast and compare growth rates and valuations across different geographies’. They also believe that the proliferation of ‘national’ and ‘regional’ funds are anachronisms, this approach leads investors to being overweight in a one market and underweight in another.

You’ll also notice that the name ‘Fundsmith Equity Fund’ doesn’t say whether its a Growth or Income Fund, he regard this distinction as artificial and a marketing ploy.

Interesting read: The Fundsmith Owners Manual.

Fundsmith Emerging Equities Trust (FEET)

On the back of a successful global equity fund, he is planning to launch an emerging market fund later this year. The trust is expected to start trading on 25 June and they are seeking to raise up to £250m. He is commited to applying the same strategy used within his existing fund, but in companies listed on the emerging markets.

Terry Smith is an investment manager of exceptional calibre. He’s a plain-speaking, outspoken maverick. And as one of the few managers I hold in high esteem; I shall be closely monitoring his next fund launch.

Fundsmith Emerging Equities Trust (‘FEET’) website –  http://www.feetplc.co.uk/

And the Fundsmith Emerging Market Equities Trust PLC – Owner’s Manual

A Profile of Neil Woodford

Neil Woodford is one of Britain’s most successful and well-known fund managers. As former ‘head of equities’ at Invesco Perpetual he ran the ‘Invesco perpetual income’ and ‘Invesco perpetual High Income’ fund, collectively managing over £25bn in assets.

Performance

His long-term track record is nothing short of outstanding. Had you invested £10,000 in ‘Invesco Perpetual High Income’ fund at launch (in 1988), it will have grown to £250,000 today (total return).

For those choosing to receive dividends, they will have collected £38,943 in income, while their capital will have appreciated to £88,150.

This is an averaged annualised return of 13.2%.

Investment Approach

Neil Woodfords approach is succinctly summed up by Mark Dampier, Head of Research at Hargreaves Lansdown:

“I have known and invested with Neil Woodford for over 20 years. He has remained consistent and true to his long-term investment philosophy, refusing to follow the herd and investing in unwanted, unfashionable and unloved sectors and companies. I believe him to be the finest fund manager of his generation and look forward to investing in his new fund at launch.”

Woodford typically holds shares for more than 10 years, he is the antithesis of short-term city culture.

For example in the 1960’s the typical investor through the London Stock Exchange held shares for eight years, today it is seven months.

CF Woodford Equity Income

Neil left Invesco perpetual in April to set up his own investment management business – Woodford Investment Management LLP

He subsequently launched a new equity income fund ‘CF Woodford Equity Income’, it became available to the public on June 19.

The fund will aim to generate an income of 10% higher than the dividend yield of the FTSE All-Share Index*.

It is predicted to yield 4.0% at launch, with income distributions paid quarterly and may invest up to 20% in international companies.

His aim – To deliver an attractive long-term return and growing income stream.

Patient Long-term capital

Neil Woodford also expressed an interest in early-stage science based businesses and highlighted Britain’s poor track record at turning great ideas into long-term commercial success. Neil believes the scarcity of capital and short-termism has created an compelling investment opportunity, he will devote between 5-7% of his fund to this area.

Woodford Patient Capital Trust plc

Elsewhere, Woodford has also announced his intention to launch the ‘Woodford Patient Capital Trust plc’, an investment vehicle which would give him the opportunity to build a greater exposure to early-stage and early-growth companies. He’s looking to raise £200m at launch.

The portfolio will represent a mix of their highest conviction blue-chip ideas together with exposure to early-stage and early-growth businesses. The fund will use an innovative fee structure, it won’t charge a management fee but will instead receive a fee based on performance.

Aim: Their aim is to deliver a return in excess of 10 per cent per annum over the longer term.

*The FTSE All-Share Index is an aggregation of the FTSE 100, FTSE 250 and FTSE Small Cap Indices

Revisiting The Emerging Market Investment Story

Emerging markets have been out of fashion of late, driven largely by current account deficits, capital outflows and a credit squeeze in China.

This brief post will highlight and reinforce the fundamentals which make the emerging markets a compelling long-term investment.

1. They are home to 85% of world’s population
2. They constitute 50% of world GDP and contribute to 75% of worlds GDP growth.
3. Comprise of mainly a young and dynamic population – between 29 and 59.
4. Has a natural resource advantage, for example its home to 90% of the world’s proven oil reserves.
5. Rise of a consumer society, fueled by the expanding middle class and higher incomes.

However, these countries only account for 15% of the world’s stock market. Roger Bootle, economist and author believes that sophisticated investors will gain exposure to the emerging markets through good-quality western companies with large operations in the developing economies.

This strategy allows you to advantages of western standards of corporate governance, attitudes to dividends and political stability – combined with a share of the emerging market growth prospects.

Source: Fidelity Worldwide Investment

Valuation: Based on forward times earnings they currently trade at a weighty 30% discount relative to developed markets. Every veteran will be aware of the fact that the lower the initial valuation, the greater the long-run returns – this is called the value effect. And, its worth remembering that Emerging economies grow at twice the rate of developed countries, which should translate into better investor returns.

Investment Funds Worth Considering

Why select investment funds over shares?

Diversification – By diversifying your investments, you are reducing your risk. An investor spreads risk across asset classes (property, shares, cash and bonds), sectors and countries.

Lower cost – Buy a diversified portfolio without incurring numerous commission charges.

Professional management – fund managers possess specialise expertise, each stock can be carefully researched.

Convenience – Researching individual shares and constantly eying the stock market is time consuming.

This is why I believe investment funds should form the majority equity portion of a portfolio.

Investment Funds worth considering

City of London Investment Trust

Objective: provide long-term growth in income and capital.

Conservatively managed, it invests principally in large blue-chip and medium companies listed on London Stock Exchange. Its biased towards large-caps.

Record: Longest record of raising dividends among investment trusts, increased for 47 consecutive years since 1966. Achieved unbroken dividend growth by retaining income from good years in revenue reserve to bolster dividends during difficult years.

Appreciated over 140% since 2009 and yields just under 4%.

Fee: 0.44%, no performance fee

Market Cap: £1.2 Billion, 76% invested in UK blue chip companies.

Net Gearing: 8%

Portfolio Manager: Job Curtis managed the trust since 1991.

Incorporated in 1891, the company is a constituent of the FTSE 250 Index. Managed by Henderson Global Investors.

This fund is included as one of Investor Chronicles top 100 investment funds and ‘whichinvestmenttrusts’ buy list.

The City of London Investment Trust (CTY:LSE) website.

Bankers investment Trust

Objective: generate maximum returns through a global, well-diversified portfolio.

Aims to also deliver divided growth in excess of Retail Price Index.

Record: Increased dividends for 47 consecutive years. It possesses ample revenue reserves to support dividend growth when required during difficult years.

Dividend yield presently 2.5%. Revenues Reserves: 32m as of October 2013. Dividends paid were 15.1m, therefore 2x dividend cover.

Capital appreciation of 120% over five years.

Manager: Alex Crooke, managed Bankers Investment Trust since 2003. Worked at Henderson since 1994. He’s a value based investor.

Has degree in astrophysics from Manchester University.

He uses shares in London to play international themes, as most of their revenue derives from abroad. Nearly 45% of portfolio is focused on UK shares.

Fee: 0.45% year, again one of the lowest in the industry

Market Cap: £680 million.

Incorporated in 1888, its constituent of FTSE 250 index.

The Bankers Investment Trust website.

Lowland Investment Trust

Objective: Achieve higher-than-average return through both capital growth and income over long-term.  They have up to 50% invested in FTSE 100 companies for stability and income, with a greater bias towards small and medium UK companies for their greater growth potential.

Gearing: Presently 13%. This fund is slightly more aggressively geared than its counterparts. Gearing is capped at 30% of fund.

Revenue reserves were £8.5 million as of 30 September 2013.

Fund launched in 1963, managed by James Henderson since 1990.

Fee: 0.59%. There is a performance fee, capped at 0.75%.

Market Cap: £391 Million

Record: 2.5% dividend yield and revenue reserves are £8.5 million.

Dividends: Grown its dividend for 19 of 20 years.

Grew by 300% over five years. Because capital growth has outstripped income growth in other portfolio, the dividend yield has fallen to 2.5%. They believe investing in high quality blue-chip stocks is an crowded trade, preferring instead to funds focus on smaller companies to yield better value.

Manager – James Henderson from Henderson Global Investors.. His is very much a pragmatic bottom-up style investor, focusing on individual companies rather than sectors, countries or the macroeconomic outlook. He’s run the fund for over 20 years and managed investment trusts for over 25 years.

Portfolio turnover – A turnover of 20% per year, and on average he holds stocks for five years.

This fund is included as one of Investor Chronicles top 100 investment funds and ‘whichinvestmenttrusts’ buy list.

Lowland is also highly commended in the Moneywise magazine UK growth and income category. And Moneywise also awarded ‘Henderson Global Investors‘, which manages the above three trusts as the ‘Investment Trust Group of the Year in the 2014′.

Finsbury growth and income trust

Objective: Invest in predominantly UK quoted shares to achieve income and capital growth. Up to 20% of portfolio can be invested in overseas stocks.

He runs a very concentrated portfolio, comprising of around 30 stocks.

Manager: Portfolio run by Nick Train of Lindsell train investment management since 2000. Nick Train and his business partner Michael Lindsell established ‘lindsell Train’ to offer pooled investments for UK, Global and Japanese equity. The company is majority owned (73%) by the two founders. This allows them to maintain the integrity of the business principles on which the firm was founded –

• To run client capital as we would run our own
• To align our interests with those of our clients
• To take the long view on investment performance and business development

His approach is based on that of Warren Buffett’s and involves building a concentrated portfolio of “quality” companies that have strong brands and/or powerful market franchises.

Their ‘portfolio has a heavy emphasis on branded consumer goods and services (Diageo, Unilever, Kraft, AG Barr), media (Pearson, Sage) and financial services (Fidessa, Schroders, Rathbones, Hargreaves Lansdown’.

Record: Dividend yield 2%. Capital growth of above 200% over 10 years and 160% dividend growth over the same period.

Fee: 0.85%, total expense ratio capped at 1.25%.

Market Cap: £605 million

This fund is included as one of Investor Chronicles top 100 investment funds and ‘whichinvestmenttrusts‘ buy list.

MFM Slater income fund

Objective: From their website: ‘To produce an attractive and increasing level of income in addition to seeking long term capital growth. The Fund will invest in shares of high yielding companies with growing profits and strong cash flows across the market capitalization spectrum’

This is an open ended investment company. They run a relatively concentrated portfolio of between 50 and 70 stocks.

He holds a balanced mix of small, medium and large companies.

Record: Yields over 3.6%. Outperformed IMA UK Equity Income benchmark last year. Funds 33.6% over benchmarks 23%. Since inception the fund is up 58%.

Manager: Mark Slater, he co-founded Slater investments in 1994. He previously worked as a journalist at analyst PLC and Investor Chronicles.

Skin in the game: Like Terry Smith (investment manager), he’s one of the largest investors in all three of his funds.

Fee: 1.5% annual charge

Fund size: £60 million.

Launched in the second half of 2011.

Fund smith Equity Fund

Objective: to achieve long-term capital growth via a portfolio of global shares. Invests in a concentrated portfolio of between 20 and 30 stocks globally.

The fund does not adopt short-term trading strategies and does not invest in derivatives.

Manager: Terry Smith, he launched the fund in November 2010. In his plain speaking style he said he would give “fat and complacent” fund management industry a bloody nose”.

He said up the fund because he believed Investors “continued to suffer from punitive fee structures, over-complexity, over-trading, fund proliferation, closet indexing and over-diversification.”

In his no nonsense style, he says ‘buy companies that can be run like an idiot, because in the end most are’

Furthermore he puts his money where his mouth is, he’s invested £25 million of his own money in the fund – he eats his cooking so to speak.

Regarding investors who wish to time the market, he says there are two types: ‘those who can’t do it and those who don’t know they can’t do it’

Fee: no performance fees, just annual cost of 1.1%

His secret ingredients: run a concentrated portfolio in well established companies and hold them indefinitely while minimizing trading. His fund has one of the lowest turnovers in the industry.

This fund is included as one of Investor Chronicles top 100 investment funds.

Fund manager Terry Smith presentation.

Royal London UK Equity Income

Objective: To achieve a combination of income and some capital growth.

It’s a core equity income fund which invests solely in high yielding UK stocks, with a particular emphasis on companies generating significant free cash flow to fund sustainable dividend payments.

The fund manager runs a high conviction stock portfolio and the risk profile reflects this. The fund has a larger than average weighing to mid-cap stocks (more than 40%).

He expects to hold between 40-60 stocks within the fund, although he presently has 72 holdings.

The fund was launched in 1984.

Manager: Martin Cholwill since 2005. Prior to joining RLAM he spent 21 years working for AXA Investment Managers. He has degree in Mathematics from Durham University.

Record: The fund has consistently outperformed its benchmark, growing by more than 160% over 5 years.

Dividend: A 3.36% dividend yield (as of 28 Feb 2014), pays quarterly dividends.

Fund Size: £1.2bn

Trustee: HSBC

Charge: At HL, net annual charge is 0.62%

Citywire awards Martin Cholwill a triple AAA rating.

The Royal London UK Equity Income Fund Factsheet.

Marlborough Multi Cap Income

Aims to generative an attractive and growing level of dividend income and capital growth through investments in chiefly small to medium sized companies.

Dividend yield – 3.7% paid bi-annually

Performance: Appreciated over 60% since inception (July 2011)

Manager: Giles Hargreaves and Siddarth Chand Lall

Size: over £700M

Fee: Annual charge 1.5%.

This fund is included on Hargreaves Lansdown wealth 150, a list of their favourite funds.

CF Woodford Equity Income Fund

Objective: Under his new investment boutique ‘Woodford Funds’, his aim is to offer investors capital growth and a growing income stream, paid quarterly. This is considered a core UK equity income fund, although it has the flexibility to invest 20% of the portfolio overseas.

Approach: His focus is on the long term – they don’t know what will happen tomorrow but they do know what drives markets over time. They are  prepared to go against market consensus to deliver superior long-term returns, an approach that has served them well in the past.

The fund is defensively positioned with a heavy weighting towards pharmaceutical and tobacco stocks. Woodford is still avoiding banks, believing the process of ‘post-crisis balance sheet repair still has a long way to go’.

In addition he’s also concerned about ‘fine inflation’, where the worlds banks are still facing increasingly onerous fines for past wrongdoings.

Dividend Yield: 4.00%, its objective is to produce an income 10% higher than the FTSE All Share Index.

Size: £4.695 Million

Performance: Since the launch in 02/06/2014 the fund has gained 11%, beating the benchmark (FTSE All Share Index).

Cost: Total Expense Ratio: 0.75%

Manager: Neil Woodford is one of the most prominent and experienced investment managers within the industry with a successful track record at Invesco perpetual.

His success stems from his ability to avoid short-term trends and fabs (i.e dotcom bubble) and invest in predictable industries such as the pharmaceutical and tobacco sectors.

This fund is included on the Hargreaves Lansdown Wealth 150, the Charles Stanley Foundation Fundlist, and Investor Chronicle Top 100 Funds. This is their selection of the best investment funds.

Additional information: Woodford Funds provides Incisive analysis and commentary through their blog.

Fixed Income Funds

Royal London Corporate Bond Trust

Objective: To maximize investment return (predominantly income with some capital growth) over the medium to long term from a portfolio comprising mainly of corporate fixed interest securities. This is a conservatively-managed fund, predominantly invested in higher-quality, investment grade corporate bonds

The fund was launched in 1991.

Morningstar allocates this fund a gold star analyst rating and Bestinvest a five star rating.

Manager: Jonathan Platt and Sajiv Vaid both have a mornigstar triple AAA rating.

Managed by Royal London Asset Management.

Performance: Appreciated by 28% over three years.

Income yield (underlying): 4.3%, paid quartely.

Size: £491m

Trustee: HSBC

Its included in HL wealth 150.

New City High Yield Fund (NCYF)

Objective: ‘To provide investors with a high dividend yield and the potential for capital growth by investing mainly in high yielding fixed interest securities’

Managed by Ian Francis since Nov 2007, he’s supported by the New City Investment Management team. NCIM is a trading name of CQS asset management.

Ian Francis holds 99,894 shares, at 64p price is £64,000.

Fund was incorporated in January 2007, Jersey.

Gearing: 107% (100 = no gearing) as of 30 January 2014. As of 2013 annual report, the company had 12m borrowings from HSBC Bank.

Revenue Reserves: as of 30 June 2013 are £12.5m. Revenues reserves are dividend income retained, allowing the company to dip into this pot during less fruitful years.

Size: £169m, trades at plus 4.5% premium.

Yield: Estimated 6.6%, increased on average 2.5% every year since inception (2007)

Total dividend paid: £9.1m as of 30 June 2013

Return: Appreciated by nearly 30% over three years.

Cost: Total Expense Ratio (TER) is 1.25%.

This fund is included as one of Investor Chronicles top 100 investment funds. Also included in John Barons Investment Trust portfolio at investor chronicles magazine.

This Fund won the Money Observer Trust Awards in 2013.