David versus Goliath: Ardevora UK Income

The UK Equity Income sector is home to a number of multi-billion pound funds, but it is a relative minnow that is generating some of the strongest returns. Ardevora UK Income has just £222m in assets under management, yet it is the third-best performer over five years with a gain of 76.3% and also has a top quartile record over one and three years.

Smaller funds can be more flexible than their larger rivals and take meaningful stakes in less liquid companies. As with David and Goliath, size can be a disadvantage because it makes it harder to manoeuvre when faced with unexpected challenges.

Ardevora UK Income was launched in January 2011 and was up 72.6% by the end of February 2015. During the same period the average fund in the sector returned just 44.9%, which is a staggering discrepancy and suggests that it offers a completely different sort of exposure.

The fund manager and founder of Ardevora is Jeremy Lang, who has been employed in the industry for 30 years, most recently at Liontrust. He has worked with his co-manager, William Pattisson, for much of his career and the two of them have all of their long-term savings in the Ardevora funds.

Over the years they have developed an interesting – and possibly unique − approach to stock selection and portfolio management that I covered in an earlier update last December (The fund manager that doesn’t visit the companies he invests in).

Lang and Pattisson look for companies where the management teams are not taking on too much risk and where the market has underestimated the business prospects, as these should provide positive earnings surprises. This tends to mean that they favour firms with decent growth opportunities.

At the end of February the portfolio comprised 35 separate stocks and was yielding a competitive 3.89% based on the trailing 12 month dividends paid by the current holdings.

There is no up-to-date information on the individual names, although the main areas that they are overweight are consumer discretionary, consumer staples and industrials, with the key underweights being energy (where there is a zero exposure) and financials. It is largely the management culture that puts them off these last two sectors.

Ardevora UK Income has a much larger weighting in the small- and mid-caps than many of the other larger funds in the sector. This could be a major plus given the difficulty that some of the blue chips are having in maintaining their dividends.