09 Jul 2019
UK Equity Income: The Case for Being Boring
With the UK equity income sector under scrutiny from investors, Colin Morton explains why an experience early in his career convinced him it was okay to take a boring approach to investing. And, he sets out the straightforward strategy that he and his team have tried to follow for the last 25 years.
In the nearly 25 years I’ve been running a UK equity income strategy, I’ve often joked about my boring approach.
Early in my career, the Dot-Com boom of the late 1990s highlighted the potential dangers of siren voices.
I remember participating in a conference in London at the time. I was the only person talking about traditional equity income. Everybody else focused on the “new economy” and the fact that everything was going to change.
Of course, we all know what happened: the Dot-Com bubble burst.
That experience taught me the value of taking a boring plain-vanilla approach to UK equity income and at the same time gave me the confidence to stick to my convictions.
A Straightforward and Consistent Approach
The way we at Franklin Templeton run our UK equity income strategies has been consistent for 25 years.
Our aim is to always have 70% of our equity income portfolio invested in FTSE 100 companies. The balance of the portfolio is invested in FTSE All-Share listed companies with the majority in FTSE 250 companies.
We’ve always been clear about the reason for that: of the FTSE All-Share Index, the FTSE 100 represents around 80% by market capitalisation, with mid-cap stocks accounting for 17% and small-caps 3%.
We recognise we need to take some risk in attempt to outperform the benchmark. In other words, in any strategy we need to be prepared to be underweight or overweight certain parts of the market. We try to do that in a controlled manner.
At our minimum large-cap weighting target of 70%, we’d have 30% in mid/small caps. That would make us 10 percentage points overweight mid/small caps.
To us, that’s more than enough risk for a core strategy. If we like a certain part of the market, we will reflect that in the portfolio. But we will not bet the whole portfolio on one outcome.
Monitoring Liquidity
Liquidity is a crucial consideration for us and it’s one of the reasons we have no unlisted assets across any of our UK equity team strategies, even in our small-cap portfolios.
Our strategies are monitored by Franklin Templeton’s risk team, which operates independently from our investment teams. It monitors the less liquid assets within our portfolios, to make sure that we are aware of assets that might take a longer time to sell and reflect that in our considerations.
We take a thoughtful and considered approach, particularly with our small-cap holdings. We don’t want to get to the stage of owing 10% or 20% of the capital of a business. With smaller companies our aim is to own less than 5% of the outstanding equity.
Once you get beyond that stage, you’re going to have difficulty changing your mind and switching in and out of companies.
The Role of Yield
One of the things we have been committed to is that every stock in our UK equity income portfolios must contribute to the overall yield we are looking to achieve.
We aim to have no stocks in our portfolio that yield nothing and we believe strongly that there’s no place in a UK equity income strategy for example for a high-growth tech stock with no yield and no profit.
That doesn’t mean that we won’t buy companies that are yielding less than the market if we see an opportunity, but everything within the portfolio contributes to the overall yield.
We believe the secret of a successful income strategy is building a portfolio that blends companies offering dividend growth potential with companies that have boasted an attractive yield.
Important Information
For Professional Client Use Only. Not for Distribution to Retail Clients.
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