Despite its launch being labelled a challenge to the UK Equity Income sector when HL Select UK Income Shares came to market on 2 March, the £205m fund has significantly underperformed in its first year.
Managed by Steve Clayton, the fund has lost 7.2% since launch versus the average return of 2.4% in the IA UK Equity Income sector.
The poor performance was largely driven by the fund's investment in Provident Financial, whose woes have been well documented over the past nine months.
Shares in the subprime lender plummeted 70% in July last year after it issued its second profit warning in three months, however the stock bounced 70% on 27 February after the firm settled a rights issue with the Financial Conduct Authority (FCA).
"It was not the outcome we hoped for when we launched the fund," Clayton said.
"We have only had one holding disappoint on its dividend," he continued. "That stock was Provident Financial, and the accompanying loss of value on that holding accounts for much of the fall in the fund's value."
In a fund update, Clayton said he had trimmed and sold positions in the portfolio to move into "faster growing businesses" such as Compass Group and GB Group.
He commented: "Some of these new positions are still quite small, reflecting their lower level of yields. But we expect them to grow their dividends rapidly over the next few years."
On the issue of the UK's exit from the European Union, Clayton said he expected "mutual interest" in trade between the two blocks to bring around "sanity" however, warned domestic politics remained a big risk.
Furthermore, the manager said the focus on businesses with strong growth drivers would provide protection from market risks such as rising interest rates.
"Dividends will keep rolling in from our companies, which is one of the best longer term protections an investor can wish for."
The outperformance of emerging markets that began in January 2016 and extended through the rest of that year and 2017 has continued in the first months of 2018. Perhaps the most important driver behind this sustained strength - the first consecutive years...
Threat of trade war escalating
Following investor ‘criticism’
A question of selectivity
'Impress on senior management the importance of diversity’