Fund profile: BlackRock UK Income

Launched in February 1984, the BlackRock UK Income fund is one of the oldest open-ended UK equity income funds. It aims to achieve an above-average income without sacrificing capital growth and it invests primarily in the shares of listed UK companies. It is a modest player with around £280 million under management.

The fund gained 20.8% over the last three years compared to the UK equity income sector average of 15.6%.

However, like most of its peers, performance has suffered over the past difficult year; it lost 3.4% over 12 months to 19 May, though it remains ahead of the sector average, down 4.4%.

In 2013 the fund was restructured, and it is now co-managed by Mark Wharrier, Adam Avigdori and David Goldman. Adam Avigdori believes in flexibility, he says: "We're not here to be value or growth managers, or small-cap, big-cap managers. We are looking for value across the market, and by value I mean share price opportunity."

High conviction portfolio

The fund's portfolio is a "high conviction" one, says Avigdori. There are only 35-45 stocks in the portfolio, in contrast to the average fund in the sector which runs over 50.

He adds that the three managers focus on their "highest conviction ideas; it's not about being a slave to the benchmark, but being as active as we can. We focus on our best ideas rather than getting lost in small holdings".

The portfolio is split into three parts. The first part consists of "cash flow" companies, which are more mature companies. This core element makes up 70% of the portfolio.

Growth companies (with shares that have growth prospects) make up another 20%, while the remaining 10% of the portfolio consists of troubled companies, where performance might turn around.

A good example for the first category of mature companies is Unilever, says Avigdori. "What's interesting about Unilever is that it's over 100 years old.

"It owns brands that have been around for a long time, such as Knorr the food business, which has been around since the time of Napoleon. It sells food and soap on a basic level, and has tremendous market positions in so many geographies around the world."

In the growth part of the portfolio, ARM, the microchip company, is a good example. It owns "well over 90% of the global market position in the engine room of your phone", says Avigdori.

"They have built that position through many years of Research and Development and they have a tremendous patent portfolio. They have a great tailwind of royalties, which is an increasing part of the earnings profile."

Turnaround companies

Carnival Cruise Line is a "turnaround" company. It had its problems over the last 10-15 years, says Avigdori, and "that would be putting it lightly". The company had very poor pricing ability and poor returns.

"We're conditioned to know that flights are cheaper if we buy them in advance. But in the cruise industry, the week before could be the prime time to buy your cruise ticket."

People worked this out and it created huge problems for the company. Now, it's changing its pricing and "that's a profitable cultural development". Turnaround companies will never make up more than 10% of the fund's portfolio, Avigdori adds.

His team has a clear thesis for every stock they own. This helps to avoid what he calls the "thesis creep", when you forget why you bought a company in the first place.

But he will sell companies for three reasons: first, because the company has done its job, and second, because he has found something cheaper outside the fund.

The third reason for selling a company is "when you're trading around macro views". The latter, he says, is the wrong reason to trade, while the first two reasons are good.

The fund can invest up to 20% overseas, but it only holds 6-7% overseas at the moment. The team's strategy is to "look for shares that are mispriced when considering the next three to five years".

Does he worry about the fact that it's harder to find income in the current climate? No, he says, "because we're in a good position to find it. We're surrounded by investment analysts".

At the moment he's avoiding utility companies, particularly power generators, because he thinks their debt levels are unsustainable. He finds opportunities in the financial space.

Lloyds and the banks

One of the fund's biggest holdings is Lloyds. "Ironically, we're quite attracted to Lloyds because it had eight years of stress-testing and regulatory pressure," says Avigdori.

"It had more health checks than an astronaut. What certainly hurt the business and shares in the past were the fines. Now we're seeing the end of this and what we have underneath is a pretty boring retail bank."

While banks used to be large dividend payers in UK market, it took a long time for them to recover after the financial crisis, he adds. "Lloyds is in strong position to lead that charge."

He finds the insurance space intriguing too, and the fund has also increased its weighting in healthcare recently.

When asked whether there is something he would have liked to have done differently, considering the fund's performance over the last year compared to the sector average, he says, after a long pause, "realistically, no".

He continues: "Last year we outperformed the market by 8 or 9%. Over the last three years we outperformed the FTSE All-Share."

He argues that while the last three years were great, "this year we're still flat on the market. I don't know where we are relative to the sector, but I don't think that's relevant on a year-to-date basis".

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