INVESTOR INSIGHT

Name: Martin Cholwill
Fund: Royal London UK Equity Income
Sector: IMA Equity Income
Performance history: 

Royal London Asset Management’s UK Equity Income fund has returned the sector’s average dividend yield for the past three years (2010: 4.5%, 2009: 6.3%, 2008: 3.7%).
Its capital growth performance is also above average. Trustnet’s data show that £1,000 invested five years ago would have grown to 1,209 over that time.

Q. What is your approach to stock selection?
A: I have been managing this fund for the past five years and when picking stocks, I look at cash flow and not profits. Cashflows are one of the key things that I measure and I am also looking for a growing dividend yield. I don’t believe in a barbell approach (using a mixture of capital and income ideas) because equity Income managers over the longer term have done better than UK All Company managers.

Q. Would you say that the portfolio is biased towards small or larger cap companies?
A. I am totally agnostic on size. I don’t like having too much money in small caps but I like mid caps. Mid caps are about 27 per cent at the moment.

Q. How have you dealt with the scarcity of bank dividends over the past 12 months?
A. I hold HSBC and have a small holding Lloyds. The holding in HSBC is by far the largest holding. I feel it is pretty well placed and it is not dependent on a lot of wholesale funding; it has customer deposits to match its loans. Also, its financial strength is a huge competitive advantage.

Financially strong companies like HSBC are at a real competitive advantage. I’ve been looking for a ‘survivor’ bias across the portfolio. From a competitor point of view, recessions shake out your weaker competition. HSBC fits into that category. It is benefiting from the demise of weaker competitors.

Q. Since you took over the fund around five years ago, what changes have you made and is there anything that you would change if you had your time over again?

A. When I took over the fund, I inherited a fund that had not been a particularly good performer. It had a rough period in terms of the performance. It had a succession of different fund managers. The portfolio needed restructuring. It was tricky – the fund had been structured along a barbell basis. My strategy was to go for broadly based stocks.

My fund has one of the least volatile unit prices in the sector. One of the reasons is that I only own 45 stocks at the moment. I reduced the number of holdings in the fund.

Q. What is your largest single holding and why did you choose it? 
A. The largest holding by size is BP. We had disappointing results a couple of days ago but the underlying fundamental change in the business is good. What the company has is very strong cash flow and can pay a sustainable dividend.

My investing is geared towards a longer-term investment. You have to try and look forward and not back and say ‘what are the prospects of the companies going forward?’

Q. Which has been your best performing stock?
A.If I had to highlight one, I would pick Dunelm. I bought this when it came to the market two or three years ago and then added to my position over the following 12 months.

It has performed very strongly. It has an immature geographic footprint and so has a low risk growth strategy and a strong balance sheet. An added benefit is that a number of competitors have disappeared. Its main competitor, I suppose, is John Lewis.

I also have a number of mid cap engineers which have performed well over the past 12 months. I am still keen on capital goods companies such as IMI Group and Spectris.

I actually have quite a range of holdings in the sector, all at a reasonable size. When others were selling capital good shares in March, I was looking for cheap valuations to buy into distressed selling, like Spectris (now over one per cent of the portfolio and part of the 16.7 per cent industrials sector holdings).

Q. What is your outlook for the UK and global economies?
A. There are some fund managers that are taking an Armageddon scenario. I am cautious on the outlook for the UK but I wouldn’t be that bearish overall. Globally, the prospects are better than the UK. In the UK economy, we will have rising unemployment but globally there are encouraging signs.

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