40 years is a long time in the investment management business – and 1974 was a particularly ‘interesting’ time to launch a fund in the UK. This was the same year that saw the three-day week, inflation at a 34-year high (17.2%), the first post-war recession and one of the worst stock market downturns in modern history.
The Henderson UK Equity Income & Growth Fund was launched on 1 October 1974, priced at 24.4p, under the name of the Henderson High Income Trust. I was not at the helm of the fund at the time, perhaps mercifully, although I have managed the fund for the last nine years and began my career in fund management over 30 years ago. In 1974 the FT 30 was the primary index, comprising such stalwarts as Dunlop Rubber, Leyland Motors and ICI. There were also no privatised utilities in those days while now they constitute some of the FTSE’s largest and most stable businesses.
The UK’s 30 largest listed companies have altered as the giants of yesterday declined and died. The conglomerates of the 1970s and 1980s had management teams that lacked understanding of individual markets. They have given way to more focused businesses that are internationally competitive. These companies are more likely to be service orientated. Commodity type manufacturing has left the UK to be relocated in low cost countries, leaving behind technology or consumer orientated companies with higher returns on capital. In some respects, this means the equity market has become less tied to economic cycles. Competitive pressures have become greater because of price comparison websites and the globalisation of trade. Businesses now need to be dynamic to succeed.
Many FTSE 100 companies now derive a significant proportion of their profits from overseas so it is often international demand which is key to their profitability. The Henderson UK Equity Income & Growth Fund tends to focus on smaller and medium sized UK companies. Many of these are benefiting from growing domestic demand but are also offering overseas clients a standard of quality and service that is perceived as ‘value added’. This provides a competitive edge when competing for business. The cash generation of these businesses should lead to strong dividend growth.
A lesson I’ve learned through my 30 years of investing has been to hold not only established companies but identify the smaller businesses that are set to grow. The fund has been helped immeasurably over the years by small and medium-sized companies evolving into the next generation of ‘big hitters’. One example is Weir Group, the Glasgow-based engineering market leader, which I’ve held since taking over the fund. The growth in international demand for its products and after sales service has been stellar, and Weir now has a network of around 200 manufacturing facilities and service centres in over 70 countries.
ASOS, an online fashion and beauty store, is another holding that has worked well and opened my eyes to the potential and the challenges of the AIM index. Having first bought it in 2005 at around 60p it promptly fell back before climbing to around 270p, which is when I began to reduce my holding, finally selling out in 2011 for a maximum price of over £23. While it began to spike sharply last year – and retail commentators were forecasting that its market capitalisation was likely to outstrip Marks & Spencer – it fell back in autumn 2014 to the levels at which I sold out.
What equity income offers, unlike bonds, is the potential for growth of income over time. With dividends set to increase, and given the intense demand for income-generative investments, I do not anticipate any lessening in demand for equity income while interest rates and bond yields remain subdued. There was a great deal of turmoil in 1974 and today’s outlook is far from certain – but concentrating on companies with good management structures, strong cash generation and healthy dividends appear to me a sensible investment strategy. My aim is, as always, to try to invest where profits and cash are growing.
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