Premier Miton UK Multi Cap Income Fund Co-Fund Manager Gervais Williams caught up with DirectorsTalk to discuss UK equity performance, the fund’s income-focused investment approach, its recent performance and the outlook for dividend growth.
Q1: Gervais, how have UK equities performed relative to other global markets recently? What could drive stronger performance from here, do you think?
A1: We all think of the UK market as being a bit dull and all the rest of it, but really over the last two and a half years, it really has come quite strongly. If you remember, back in March of 2024, that’s two and a half years ago, we were still looking at the FTSE around 7,400/7,600 and what’s been interesting about the last two and a half years is it’s really appreciated quite a bit.
Even now, with the market having just peaked out a little bit with the uncertainties in Iran, it’s still pretty much one of the best-performing markets globally, and that’s in total return terms. You don’t just get the capital appreciation, you get income and income growth over the time.
What’s been interesting is it has been outpacing many of the international comparatives, including the S&P and some of the others. So, the UK market has done pretty well over the last two and a half years, even at a time when many local investors have continued to reduce their holdings. So, it’s been a pretty good period for the market.
If you ask about what’s happening next, I think there’s going to be a big shift. Many investors are invested in companies which appreciate that dramatically, like many of the US mega-cap technology stocks. They’re called high beta, they’re very volatile holdings. We think there’s going to be a rebalancing into income and income-growing assets, low-beta shares and we think the UK will be one of the prime beneficiaries of that in the coming years.
Q2: For investors discovering the Premier Miton UK Multi Cap Income Fund for the first time, could you just introduce its investment approach and how it differentiates itself from a more traditional UK equity fund?
A2: The first point is, it’s an income fund. In other words, a large part of the return comes from not just the income, but the income growth over time. As the companies grow their dividends, then that drags up their share prices, even in relatively flat markets. So, you get a good return from income and income growth as a starting point, even if stock markets don’t go up much.
The more important feature was that actually I think there’s going to be a rebalancing away from major capital appreciation stocks into good and growing income stocks. So, we believe that the opportunity for this fund to differentiate itself from others, other equity income funds, is not just that we can invest in some mainstream equity income stocks, but particularly some of the less well-covered mid-caps, small caps, AIM-listed companies. We pick out those which aren’t just lowly valued but actually generate better income growth than the mainstream companies, then we believe that income growth will be actually better than many of the peer group. Better still, we think as that income growth comes through, then the total return will be better as well.
The fund’s been going some 15 years now, and it has produced one of the best returns in the sector relative to its peer group at a time when things haven’t been easy. Let’s be honest, small company share prices have been under pressure over the last years. The UK’s been somewhat out of fashion, lots of other things have been going on elsewhere, but what’s interesting is the fund, even in those less favourable circumstances, has generated some attractive returns relative to its peer group.
If we are lucky enough to find that actually there’s a bit of a tailwind going forward, small-cap effect comes back, maybe equity income becomes a more mainstream asset class for institutions, then we think hopefully the opportunity for the fund to perform going forward is a lot more significant than it has been over the last 15 years.
Q3: You were just saying how well it performed in terms of returns. It was 17.64% in the year to the 30th of June this year, outperforming the IA UK Equity Income sector. While its return since launch remains substantially ahead of both the sector and its index, what have been the principal drivers of that performance, would you say?
A3: One of the things which hasn’t been a principal driver is takeovers. We’ve tried to avoid many of our companies being taken over. We’ve asked them very much, if they do get takeover approaches, please politely tell the takeover company to go away because although you can get some good uplifts in share prices on the day, many of these companies are overlooked in valuation terms. That’s because the UK has been perceived as a dull market over a period when actually you’ve got extraordinary returns from some of the Magnificent Seven stocks, the big technology stocks in the US.
Going forward, as I say, I think the pattern is changing. The Magnificent Seven isn’t performing as strongly as it did previously and so actually, we’ve got companies which produce plenty of income and income growth. It’s really the ability of those companies to exceed expectations in terms of that income growth and the cash generation of that income from their companies, which is driven by income growth, which has been the principal driver of the return.
So, although the total return is an attractive total return, a very large part of that has come from income and income growth over time, and it’s that feature which actually has helped it be one of the strongest performers in its sector.
Q4: Now, the fund reported a historic yield of 4.58% at the 30th of June. What gives you confidence that the portfolio can sustain that level of income? What potential is there for dividend growth just going forward?
A4: We’ve got to be a little bit careful about what we expect about the future. The range of options with the current economic and military outlooks are that things could recover. We could get settlements in the Middle East. We could get settlements in Ukraine. We could find that actually some of the tensions which have been within this global market with trade tariffs, and suchlike ease back a bit.
So, we could see a very good period of growth as artificial intelligence invests hard and you get good growth from there. You could find economic growth turns out just fine. So, you could just get a nice market recovery and as I say, rebalancing into equity income shares. So, I think all of that could just lead to a very nice return.
On the other hand, it could turn out that things turn out very badly. It could be that the military situation gets worse. Perhaps inflation turns out to be worse than expected. It could be that stock markets have a wobble. There will be a global recession at some stage in the future. What we can’t say is whether it’s three months away or three years away.
The key feature of income shares is if we get that more unfavourable outcome, they go into the downturn with strong balance sheets, they go into the downturn generating surplus cash. So, they’re less affected by the downturn. But much, much, much more important than that is, as other companies fail, they can expand into those vacated markets. They can acquire assets from the receiver, sometimes for as little as a pound or a dollar, and actually greatly enhance their growth.
My expectation is the UK stock market in that more unfavourable scenario actually doesn’t just outperform but outperforms with greater magnitude. Many of the companies in the portfolio, which are less mature, standing on overlooked valuations, actually have a period of not just outperformance, but quite significant outperformance.
So coming back to it, I think the income and the income growth hopefully will be sustained. I can’t promise anything, we couldn’t see COVID coming and there were dividend cuts during that period but coming back to it, the companies themselves tend to be quite strong financially. The worse the world becomes in terms of economic setbacks, the more the opportunity for those to outperform.
So it’s an uncertain outlook but this is a fund which we believe has good positioning to withstand whatever comes up. If things turn out to be favourable, of course, we expect those undervalued companies to move up to more normal valuations as well.
Premier Miton UK Multi Cap Income Fund is an open-ended investment company (OEIC) that aims to deliver long-term income and capital growth by investing across the entire market capitalization spectrum of UK-quoted companies, with a notable bias toward overlooked small and micro-cap value opportunities.
