Smith & Williamson’s Frikkee: ‘No excuse’ for delivering income less than the market

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UK equity income funds remain popular with retail investors while interest rates linger at all-time lows. But with some managers struggling in their search for yield, they are under pressure, particularly from the Investment Association, which has recently been kicking out funds that fail to generate a rolling yield of more than 110 per cent of the FTSE All Share over three years.

Smith & Williamson’s Tineke Frikkee is not only confident in her ability to meet the minimum requirement; she is vocal in admonishing those who don’t.

“If you run an income fund, then you need to deliver income,” she says. “The sector requires a minimum 10 per cent yield at the moment. That is a finger-in-the air number from years ago when we had interest rates, so is it sensible to review that number? Possibly. But there is no excuse for delivering income of less than the market.”

Frikkee, who recently marked three years at the helm of the Smith & Williamson UK Equity Income fund, says she has averaged a 20 per cent yield during her tenure, an improvement on the three-year rolling 12 per cent yield the fund was averaging before she came on board.

“I don’t want to run it tight, I want a security buffer,” she adds. “I’ve got three years to make 10 per cent but if I fall below I will need to catch up. My investors shouldn’t have to worry about it. Equities should deliver real dividend growth. I seek to annually grow the dividend distribution in line with RPI. Dividend growth is a commitment. For some other managers dividend growth is whatever they get.”

CV

July 2013

Tineke Frikkee moves to Smith & Williamson to run the group‘s UK Equity Income fund

April 2004

Frikkee appointed manager of the Newton Higher Income fund (now called the Newton UK Income fund)

2002

Frikkee joins Newton Investment Management

Frikkee, who has been a UK equity income manager since 2002, spent 15 years at Newton Investment Management, the bulk of which was spent running the Higher Income fund (since rebranded to the UK Income fund). In December 2012, Frikkee was replaced as manager on the fund, which had £2.2bn in assets at the time, and in July 2013 she moved to S&W on the promise of autonomy and a significantly smaller mandate to run.

“At Newton I spent over 10 years growing assets, and the fund got to a size as such I didn’t want to grow it anymore. It was about maintaining the franchise rather than growing the assets. I wanted to find a house investment style that was more representative of what I thought a product should be. Where the fund manager decides how the fund is run and has aspirations to grow the fund.

“There is no S&W approach. If there is a common ethos, it is to lose less money in falling markets. The bulk of the money is private wealth so we don’t have to shoot the lights out when the market is rising. We are more risk aware.”

When Frikkee took over the S&W UK Equity Income fund in July 2013 it had £8m in assets under management; it now has £50m, which Frikkee is clearly pleased with, but she is not looking to scale up the fund to Newton-sized proportions.

“The style is nimble and active and can be run well up to £1bn, but it’s not a £10bn fund. Clearly I am ambitious and want to grow the fund, but not at the expense of yield and volatility characteristics.”

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Frikkee actively tries to keep volatility in check, the idea being the fund’s total returns are less volatile than the FTSE All Share, meaning the fund should suffer less in falling markets. She also aims to outperform her peers in rising markets by investing across the market cap spectrum. The fund currently has 60 per cent in the FTSE 100, 30 per cent in the FTSE 250 and 10 per cent in small caps, although Frikkee says this is an outcome rather than a target.

She is also willing to trade stocks as opportunities arise, such as on 24 June when the markets were in turmoil following the Brexit vote.

“This is a dynamic fund. If there is short-term overselling or overbuying I can jump in. The day after Brexit Next was down to £35 but I sold it at £51 on Monday. Usually the portfolio trundles along but sometimes I can put the cherry on the cake. I will have already modelled the stocks and know where I would be prepared to buy.”

As such, the fund’s turnover is likely to be 200 per cent this year, although Frikkee points out a large proportion of the fund is “quite steady”. The fund has 47 positions and tends to hold anywhere between 0 and 15 per cent cash, but currently has 9 per cent as Frikkee thinks the market “is looking too good”.

Prior to the referendum, Frikkee had invested half of the portfolio in stable income stocks – such as utilities and pharmaceuticals, and half in growth income stocks. She says: “I figured some might get hurt, but they were hurt more than I thought.”

Although the Brexit outcome knocked Frikkee for six, she wasted no time in taking advantage of the fallout. She says: “I thought people were rational and I was wrong – they are emotional. It was a shock on 24 June when I checked my phone at 5am. But life goes on.”

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Post-Brexit, as well as ramping up the Next position, Frikkee built up weightings to dollar earners such as Diageo and Astra Zeneca, although she admits she is underweight the FTSE All Share when it comes to dollar earners. While some of the portfolio’s dollar earners are expensive, Frikkee says her “gut tells her they might get really expensive”.

During the uncertainty preceding the referendum, Frikkee was searching for domestic stocks where there was “no hope priced in”; those displaying deep value but where the risk to the downside was less than the risk to the upside.

These Brexit stocks’ include Easyjet, retailers Halfords, Next and Debenhams and consumer stocks Restaurant Group and Mitchell & Butler. Since the Brexit vote, Frikkee has reduced this theme (it now represents around 6 per cent of the portfolio), although she is happy to have 1.5 per cent in fashion and is confident the UK will continue to spend money on eating and drinking.

A key holding in the portfolio that is not affected by Brexit is BBA Aviation, a “self-help story” that recently acquired Landmark Aviation and generates 90 per cent of its profits in the US.

“BBA ticks a lot of boxes,” Frikkee says. “Its performance is OK but it declares its earnings in dividends, which is going to be nice. There is a lot of value there and Brexit doesn’t matter to them.”

Frikkee began buying into BBA around a year ago, when she says it was cheaper as people were scratching their heads about the acquisition, a rights issue and the firm taking on more debt. It is now a 3 per cent weighting.

“BBA is now getting to the good bit. It has spent the money to bed in Landmark and is now reaping the benefits.”

Year to date the S&W UK Equity Income fund has returned 4.38 per cent against the 2.25 per cent average of the IA UK Equity Income sector, according to FE data.

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