Tom Moore, manager of the U.K. Equity Income Unconstrained Fund at Standard Life Investments, benefited for two-and-a-half years by looking for superior returns outside the biggest dividend payers in the benchmark FTSE 100 Index. That strategy backfired last quarter.
His fund was the third worst of 101 similar funds in the three months to Sept. 30, according to Chicago-based research firm Morningstar Inc. Over the previous 10 quarters, since Moore took over at the start of 2009, it ranked fourth of 83 funds, Morningstar said. Financial stocks Melrose Plc, 3i Group Plc and Man Group Plc, three of its largest holdings, fell twice as much as the index or more, dragging down returns.
“The strategy hasn’t worked in the last six to eight weeks because midcap stocks tend to underperform in times of stress,” Moore said in a Sept. 27 interview at Bloomberg’s Edinburgh office. “We just need a change of sentiment. If we get a tailwind the risk aversion will wane.”
With U.K. interest rates at record lows, investors have favored companies handing out more of their earnings to shareholders. Since Moore took over the 58 million-pound ($90 million) fund, dividends have added 75 percent to the return on the FTSE All-Share Index, according to Morningstar.
From the start of 2009 to the end of the second quarter, the fund, which targets individual investors rather than pension funds, posted a total return of 84 percent, according to Morningstar. That slumped to 54 percent by the end of the third quarter. The earlier outperformance means it still ranks fifth-best over Moore’s tenure.
Standard Life Investments, Edinburgh’s largest money manager, oversaw 156.9 billion pounds as of June 30. Moore also manages three funds for institutional clients with assets totaling 430 million pounds.
Melrose, a U.K. investment firm that on Sept. 27 abandoned plans to buy Charter Plc, plunged 39 percent in the quarter. 3i Group, the U.K.’s largest publicly traded private equity firm, declined 33 percent. Man Group, the world’s largest publicly traded hedge fund manager, dropped twice the 14 percent decline in the FTSE All-Share Index.
“This fund is trying to get away from indexes, it’s much more my best ideas,” said Moore, 35, who holds about 60 stocks in the fund. “What is helping is taking a different view and looking in places where traditionally income funds don’t go.”
Three quarters of all U.K. dividends are paid out by 20 companies, headed by Vodafone Plc, the world’s biggest mobile-phone operator, and Royal Dutch Shell Plc, Europe’s largest oil company and the fund’s largest holding. Only four of them are among Moore’s 20 largest investments.
Other holdings include Stagecoach Plc, the Perth, Scotland-based bus and rail operator that said in August it is returning 340 million pounds to investors in cash. Its stock has risen 14 percent this year.
Moore has trimmed stakes in HSBC Holdings Plc, Europe’s largest bank, BP Plc and copper producer Kazakhmys Plc and sold out of Domino Printing Sciences Plc, while increasing holdings in companies such as Johnson Matthey Plc, the producer of a third of all auto-catalysts, oil services company Petrofac Plc and software maker SDL Plc.
Thirty-four companies in western Europe were identified by Bloomberg in August as having scope for dividend increases or buybacks, based on stock market value and analysis of payouts.
They included seven of Moore’s 20 largest holdings: WPP Plc, Imperial Tobacco Plc, Carillion, Melrose, HSBC Holdings Plc, caterer Compass Group Plc and money manager Ashmore Group Plc. The risk of financially sound companies cutting payouts is less now than in 2008 or 2009, Moore said.
Earnings per share are now on average 2.8 times higher than dividends, the highest multiple since 1975, according to Moore. At the same time, share prices are at their lowest relative to earnings since 1982, apart from at the height of the global financial crisis, he said.
“The market is rich with opportunities,” Moore said. “Stocks with structural growth drivers are available at an unusually reasonable price.”