The LF Gresham House UK Multi Cap Income fund has sold out of holdings in the housing services sector, while maintaining and adding to under-pressure leisure stocks, as part of efforts to maintain a yield of up to 4% in a UK equity market that has seen widespread dividend cuts as a result of the coronavirus pandemic.
Speaking to Investment Week co-manager Brendan Gulston (pictured) explained that as the realities of the pandemic were realised early in 2020 the team identified that roughly 10% of the portfolio was in sectors most at risk of dividend disruption.
Lead manager Ken Wotton said the decision to drop housing-related stocks such as bathroom product supplier Norcros was made as the impact of lockdown meant building sites would be shut down, while the economic impact means any "big ticket" consumer spending of this kind is also under pressure.
Conversely, while lockdown has impacted "less cyclically exposed, low ticket experiential leisure" such as pubs, bowling alleys and gyms, the management team believes these stocks have better prospects over the longer term, Wotton explained.
He added: "While short-term revenues and earnings are under pressure, the ones we hold have got balance sheet strength to withstand protracted disruption and will be the stronger companies within their sectors once can get back to normal."
The fund, which recently surpassed its third anniversary, has returned 1.1% and 20.4% over one and three years respectively, according to FE fundinfo, comfortably beating the IA UK Equity Income's average losses of 14.5% and 9.6% over the same periods respectively.
While the fund has not been immune from the March sell-off and the volatility seen so far in 2020, it has fared better than the sector's losses of 19.9% over the six months to 8 July with a fall of 13.3%.
Outperformance since the start of the year can largely be attributed to the fund's avoidance of sectors such as oil and gas, and banks, but the fund also went into the sell-off with a larger than average cash position.
Wotton explained this was partially the result of inflows in the week before the sell-off, but also because the team "entered 2020 concerned about the [level of] the post-election bounce in shares and the realities of the Brexit implementation".
The fund is offering a yield of 4.3%, compared to an average of 5.3% for the sector as a whole.
Gulston said the fund is now targeting a yield of between 3.5% to 4% for 2020, and the team expects ongoing returns to be driven by its overweight exposure to consumer finances such as specialist insurers Sabre and Randall & Quilter.