Standard Life Investment’s Thomas Moore has long been wary of the concentration risk within the IA UK Equity Income sector, pointing out that many fund here are clustered in a few of the UK market’s top dividend payers. 
The manager’s £930.4m Standard Life Investments UK Equity Income Unconstrained fund, however, takes a different approach to many of its peers, building an unconstrained, concentrated and all-cap portfolio that pays no attention to the make-up of the FTSE All Share and looks very different to its average peer as a result.
Moore recently told FE Trustnet that he thinks many of the typical defensive income stocks are heading into “almost a perfect storm”, owing to the likelihood of interest rate rises and a lack of dividend cover among some of the most popular names.
He prefers to find companies that offer the potential for a growing dividend – albeit from a lower base – and decent capital appreciation on the way. He has achieved his as well, growing the fund’s dividend in every year that he has been in charge.
Performance of fund vs sector over manager tenure
Source: FE Analytics
“We don’t want to wait for the yield to reach 4 per cent. We buy stocks when they’re really young, maybe yielding 1 per cent or even nothing,” Moore (pictured) said. “Some of the best investments we’ve made over the past six-and-a-half years have been stocks with the potential to pay a dividend but not necessarily here and now.”
In the following article, we look at five stocks Moore is excited to be holding in the five FE Crown-rated Standard Life Investments UK Equity Income Unconstrained fund.
Staffline
Staffline Group specialises in temporary and permanent recruitment in logistics, e-retail, manufacturing, driving, food processing and white collar roles, supplying more than 43 million hours of temporary labour a year to over 1,300 clients.
“One of the earliest investments I made when I took over the fund was Staffline, which is a small-cap recruitment company. This is a company that has had three different strategic plans to double earnings and they’re in the middle of the third one and are on track to double earnings again, having down it before,” Moore said.
“When I bought shares in Staffline, it wasn’t yielding anything like Glaxo or Shell or any of those mega-cap stocks. However, it’s turned out to be a far superior investment because we’ve have a period of very rapid dividend growth and extremely strong capital growth. The two have gone very much hand-in-hand.”
The company, which is the 10th largest holding in Standard Life Investments UK Equity Income Unconstrained, has risen 525.42 per cent in the time Moore has been running the fund, outperforming its sector and the AIM index.
Performance of stock vs sector and index since 1 Jan 2009
Source: FE Analytics
Rightmove
“More recently we’ve been adding to Rightmove, which we bought when there were concerns about the OnTheMarket property portal,” the manager said. “That was yielding 1 or 1.5 per cent and didn’t look like a yield stock but they grew their dividend by 25 per cent in their recent results.”
Rightmove remains the dominant property website in the UK, in spite of the competition from OnTheMarket, which launched in January and was founded by a group of leading agents, including Savills, Strutt & Parker and Knight Frank.
OnTheMarket’s contract effectively bans estate agents who want to join it from listing their properties on either Rightmove or Zoopla. However, Rightmove seems to have been more effective at retaining business.
Rightmove’s latest results show revenue rose 19 per cent in the year ended 31 December 2014, moving from £139.9m to £167m. Underlying operating profit rose 20 per cent from £104m to £124.6m, while its total dividend when from 28p to 35p.
SuperGroup
While most equity income funds prefer defensive holdings, Moore combines low-risk stocks with decent income-payers like National Grid, Direct Line and Hiscox with firms that are racier but disliked by other investors.
“We are able to run some pretty volatile names. We bought SuperGroup in early April when everyone had written it off,” he said.
“It had a profit warning due to the unseasonably warm weather in autumn. Everyone had given up on it and we thought that was a great time to say ‘we don’t think this is actually over’. For example, the business is going internationally.”
Although the manager only recently bought the stock, the graph below shows how up and down its performance has been over the past five years. The stock has been rising steadily since March, however.
Performance of stock vs sector and index over 5yrs
Source: FE Analytics
In March, the company presented its strategy update and outlined plans to “deliver sustainable growth” while “creating a global lifestyle brand”. It also announced that it would start to pay a “prudent” dividend in 2016, with payouts being in a range of three to three-and-a-half times earnings.
Virgin Money
This UK-based bank and financial services company was launched in 1995 by entrepreneur Richard Branson and has built up a base of around 4 million customers. Moore believes it could be a serious challenger to the larger players in the industry.
“We bought Virgin Money when it didn’t pay a dividend and it’s just announced its maiden dividend, nearly a year after listing. They’d had a bit of a barren spell of no dividends – but I knew that when I bought it and had faith they would start paying one,” the manager said.
“We have faith in chief executive Jayne-Anne Gadhia that she’ll do a great job. She’s been picked by Richard Branson and is highly dynamic, a real go-getter. When you meet her, you just think she’ll be a winner. Out of all these different banks, we think this is one that’s going to shoot the lights out in the next few years – it has no legacy issues, can grow market share and is going to make a success out of it.”
DFS
Recent months have seen early cyclicals like Travis Perkins and Howden Joinery do well on the back of a recovering economy and signs of improved consumer confidence but the manager has found a stock that many others have been ignoring.
“Things like doing up your home is something you do at this part of the cycle and usually you don’t hang around too long with those sorts of stocks. You find that these are good investments at one point in the cycle but they quickly play out. We’re looking at these quite carefully at the moment for opportunities to rotate from consumer staples to something unrecognised by the market,” he said.
“We bought into a stock that many investors would see as a bit too dirty – DFS. It’s actually an income stock, yielding over 4 per cent with a P/E ratio of 11 times. Believe it or not, their return-on-equity is as high or higher than the best-in-class in the retail sector. The reason they can be so strong is because it’s not a business that can move online – you want to sit on a sofa before you buy it.”
Performance of stock vs index since listing
Source: FE Analytics
Since listing on the London Stock Exchange earlier this year, the stock has been more volatile than the FTSE Small Cap (ex IT) index but has posted a 13.74 per cent total return.
