Fund profile: GLG UK Income

Manager Henry Dixon was handed the reins of GLG's UK Income fund shortly after he joined GLG last October, since when he has transformed both the portfolio and the fund's performance.

In the near nine months Henry Dixon has been running GLG's UK Income fund the manager has delivered an impressive 10.4% return, more than double that of the fund's sector, IMA UK all companies, and over 4% more than its benchmark, the FTSE All Share index over the same period.

This is a remarkable turnaround for a fund that prior to Dixon's arrival had been dwindling in the third quartile of the UK all companies sector for over two years, returning 36% compared to an average sector return of over 42% between December 2011 and December 2013.

Vaule, value, value

Since taking over Dixon has applied much the same investment process he has used over the past six years on the Matterley Undervalued Assets fund, the flagship vehicle of the boutique investment firm he directed and founded.

Despite being launched at an arguably inauspicious time - August 2008 - the FP Matterley Undervalued Assets fund has delivered an impressive 122% since inception, close to double that of the UK all companies sector and FTSE All Share index, both of which have returned 62% over the past six years.

Dixon takes what he describes as a "three-pronged" investment approach in both the GLG UK Income and Undervalued Assets funds, focusing on firms with yields of "at least" half that of the market; strong, above average cash flow; and where projected dividend growth is at least twice that of the market.

Traditional "value" metrics are also important to the manager, particularly low price/earnings (P/E) ratios and depressed share prices based on, usually, unwarranted negative sentiment.

"Value has to be there, which for us is cheaper than the market, growing faster than the market with upgrade momentum and a miles better balance sheet. We're fishing in some pressed market caps where we think there is potential for really decent earnings and asset uplifts," says Dixon.

Out with the old

The manager's investment view led him to sell or reduce much of the GLG UK Income fund's large-cap holdings when he took charge, particularly FTSE 100 energy companies National Grid and Centrica alongside other UK market giants Rolls-Royce and Reed Elsevier.

Dixon does still hold a number of big names, with his top 10 holdings consisting mainly of the usual UK income suspects such as Royal Dutch Shell, BP, Vodafone and GlaxoSmithKline, however the manager claims it is stocks 20 to 30 that are "the real engine room" of the fund.

This segment of the portfolio certainly contains some surprises, such as Trinity Mirror Group, a firm that until July had not paid a dividend since 2008. However, having moved from a £500 million net debt to a net cash position and trading on a P/E of just 6 times, Dixon says he felt the stock was simply "too attractive not to invest".

The manager has also taken advantage of his ability to hold up to around 10% of the fund's portfolio in European stocks, buying shares in European postal firms including Portugal's CTT and Belgium's Belgium Post, as well as life insurance firms including Allianz.

In both cases the manager cites more attractive valuations than equivalent companies in the UK with European postal companies up to 30% cheaper than Royal Mail, for example, and life companies trading on P/E ratios of around 8.5 times versus an average of 12.5 times in the UK.

"Competition for capital is becoming increasingly international; investors have a greater willingness to go further afield than perhaps 10 years ago and so if there are 20 or 30% value disparities in Europe versus the UK we think it would be a great shame if we didn't back those," Dixon says.

According to Dixon, over half of the UK market has been "expensive" since May this year, which has meant he has had to "work very hard to deliver returns". Nonetheless the manager has found interesting opportunities at home, like Trinity Mirror, as well as a number of UK housebuilders.

The latter were fairly typical holdings among UK managers last year, but have fallen out of favour as huge gains combined with fears over a potential housing bubble have driven investors away. Again though, Dixon finds it difficult to argue with the numbers.

"We don't deny that the political backdrop is difficult but we would be mortified if, looking back, we didn't buy a stock like Taylor Wimpey with a P/E of 7 times yielding 8% because the Labour party might say something. This time next year I will be shocked if Taylor Wimpy is not above 1,500p," says the manager.

Yielding results

If GLG UK Income's yield is anything to go by, all of Dixon's hard work is paying off. At 3.54% the fund pays the third largest yield in the UK all companies sector - no mean feat in a sector of 277 funds.

To support this Dixon says he "selectively" buys bonds issued by the companies whose equity he is already invested in where he believes he can combine "capital upside in the region of 10%' with coupons of around 10%.

"If we can combine the notion of equity value with attractively priced bonds then we think, risk adjusted, it is very attractive. Particularly if the firm's bonds are trading at a discount to par where you get the capital upside as well as the coupon, which can be very powerful," explains Dixon.

As an example, Dixon cites the Thomas Cook bonds he holds in his Undervalued Assets fund, which two years ago he paid 60p in the £1 for at a yield of over 8%; they are now trading well above par at around 106p.

In the future Dixon envisages holding more bonds in the fund, which can comfortably accommodate up to 10% without breaking any rules. However, in the current market environment he is happy to stick to around 5%.

Once he has managed the fund for a solid year, which will be in December, the manager also hopes to be in a position to attract new investment and begin grow the fund from its current £73 million level, which as one website recently observed, is cheaper than footballer Louis Suarez.

However Dixon is in no rush, stating that following Neil Woodford's departure from his £30 billion income mandate at Invesco Perpetual this year, he believes that there is "more of an understanding that the larger funds are a bit cumbersome now and smaller funds have a place".

'We have a very strong feeling that it is the small and nimble income funds that can do better, so we have a very clear idea about the size of the fund we can run. We don't think we could deal with much more than £1 billion and we hope over the next few years that is the amount of capital we can find,' explains Dixon.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.