fund manager david horner trying to bump up yield following departure of Webb
The number of stocks in the Premier UK Smaller Companies fund is to double and 10%-15% of the top-performing portfolio is to be invested in large caps following a change of manager.
Chelverton Asset Management took over running the top-performing portfolio on 1 July from Unicorn after former manager Peter Webb decided to launch his own smaller companies unit trust (see page 5).
David Horner, a director of Chelverton, who also runs BFS's Smaller Companies Dividend Trust, is lead manager on the fund and, since taking over the portfolio, has been making adjustments in order to bump up its yield.
Horner said, historically, the fund has held between 5%-7% in cash for liquidity reasons, something he intends to reduce to 2%.
In order to facilitate liquidity, Horner is looking to put 10%-15% of the fund in high-yielding, large-cap stocks, which he can sell out of easily when he identifies a good small-cap opportunity.
He gave the example of Lloyd's TSB, which is yielding around 6% and is well positioned to maintain its dividends. The stock will be easy to sell when a good opportunity is found in smaller companies, he added.
The large caps will give a boost to the overall yield of the fund. This is currently 3% but Horner would like to see it move to 4%. Despite this he does not intend the fund to become an income portfolio, it will remain focused on growth.
Horner's move to increase the number of holdings in the fund is also helping boost its yield. Webb typically ran an extremely concentrated portfolio of about 20 stocks but Horner is more comfortable with greater diversification. He will gradually move the holdings up to around 50, he said. Since the start of the month, the fund has moved from 21 to 27.
Horner, who looks to invest in companies between £10m and £300m market cap, has already sold out of four of Webb's previous holdings but noted there have been problems selling out of others.
Webb held some stocks across several of his portfolios and was one of the few managers interested in those opportunities, making the stocks difficult to dispose of.
Dividends are the current driving force behind returns, he said, noting that even if the capital growth in the fund remains static, something he is forecasting from the small-cap market over the next few months, dividends should provide steady returns.
Horner, whose stockpicking style Premier believes is similar to Webb's, said he tries to see at least one new company a week, even though he gets requests for about 10 meetings each week from businesses.
He favours companies with strong management and balance sheets. 'We like steady progress in a company; a business that has a clear vision on how to get from A to B,' he said. 'The moment it does something we do not understand, we get nervous. We're not too keen on exciting surprises.'
One holding that Horner thinks has much further to go is the £8m company, Weeks. The engineering, management consultancy and materials testing business is sure to benefit from increased public spending, he said. The stock is currently on a P/E of 7.6 with a yield of 3.1% and no debt.