Artemis Income managers have been trimming top-performing positions and building up cash levels amid an "exercise in survival" for investee companies, with the fund preparing for widespread dividend cuts in the months ahead, according to co-manager Andy Marsh.
The ongoing market sell-off stemming from the coronavirus pandemic has seen the fund's assets plummet from £5.2bn to £3.4bn over one month to 18 March, Fe fundinfo data shows, accounting for a 35.8% decline.
Speaking to investors on Tuesday (24 March) Marsh, who manages the fund alongside Adrian Frost and Nick Shenton, explained the team had built cash holdings up from 2% to around 3% after trimming "a number of our better performing positions", including HSBC, software firm Sage and Evolution Foods, "to improve the cash holding In the short term".
Marsh said the team had been "pleasantly surprised" at liquidity levels and the capacity to exit these "defensive" positions, adding that the sales were not linked to "big redemptions", with the fund actually seeing "smaller net inflows in recent days".
"We think it is right to be cautious and have increased our cash holdings slightly," he added.
"We are really in a totally unprecedented set of circumstances where there is no previous playbook. This is going to lead to a totally different sort of recession.
"In the short term, clearly, this is an exercise in survival and getting to the other side."
The managers of the fund, which is down 36.4% year-to-date, are now expecting and encouraging investee companies to protect liquidity and slash dividends over the short term.
Marsh said the team had identified "dividend vulnerabilities", particularly "on front line" of the pandemic in sectors like travel and other consumer facing businesses, which account for around 8% of the fund.
He added that material share price declines have been suffered by investee companies such as Card Factory, William Hill and ITV, where the managers are expecting "100% dividend cuts".
Similarly, "more credit exposed and global growth exposed businesses" such as insurers, banks and the oil sector are expected to post dividend cuts of 25% to 50%.
Explaining why the fund is "sticking with" these companies, Marsh said: "If we believe we are going to fly again, go on holiday again, go to the pub again and attend a corporate event again, these businesses are now protecting themselves to the death for the downside, and potentially have very strong equity price recovery in due course."
He added that while the management team "would rather not see [dividend cuts] for our unit holders", they see this approach "as a much better solution for medium-term prospects to deliver returns than a permanent dilution from increased share counts".
Marsh said: "What we what we really are trying to avoid is companies that are having to raise new equity at deeply distressed share prices.
"If we have to share upside with 30%-plus more shareholders, this will dilute our medium term prospects for delivering a good return to unit holders from our current investments."
"We want to see our management teams take actions that really protect the fabric of a business and think about what the business will look like when normality returns."
The Artemis Income fund is down 28.9%, 23% and 14.4% over one, three and five years respectively, outpacing its IA UK Equity Income sector, which is now down 29.6%, 26.7% and 18.5% over the same periods respectively.