Index-aware Claverhouse cuts fund managers’ risk limits

‘Dividend hero’ JPMorgan Claverhouse has given fund managers William Meadon and Callum Abbot more freedom to stray away from the FTSE All-Share, doubling the amount they can ‘overweight’ and ‘underweight’ sectors.

‘Dividend hero’ JPMorgan Claverhouse (JCH ) has given fund managers William Meadon and Callum Abbot more freedom to stray away from the FTSE All-Share, doubling the amount they can ‘overweight’ and ‘underweight’ sectors and enabling them to shun big chip stocks altogether if they don’t like their prospects.

Historically, the £442m UK equity income trust has operated a more ‘index-aware’ approach than many of its rivals. The changes to risk management limits announced today loosen the restrictions on the stock pickers and allow them to express more conviction running the portfolio of 60-80 holdings.

It will also give them more leeway if they wish to shift the ‘blended’, style neutral fund even more towards ‘value’ areas of the UK stock markets, such as oil, mining and financials, to which they rotated at the start of the ‘vaccine’ rally in November.

It may also afford them more room for manoeuvre in the hunt for income. The trust has increased its dividends for 48 consecutive years but is looking to boost earnings after last year’s pandemic-induced dividend drought.

Following a review, the board of the 58-year-old listed fund, said it would allow the managers to deviate the trust’s sector weightings by a maximum of 10%, double the previous 5% limit compared to its stock market benchmark.

At a stock level, while an existing cap preventing individual equity positions exceeding the index by more than 3% remains, the 3% restriction on stock underweights has been removed, allowing the duo to avoid holding big blue chips they do not like.

In theory the sector change means the trust could plough even more than the 26.6% it held in financial stocks at the end of April. That position represented 3% more than the All-Share index, meaning it could be increased by 7% to over a third of shareholder’s assets.

Alternatively, the fund managers could cut their exposure to consumer staples, an area that accounted for under 7% of assets, 8.5% less than the weighting of the UK benchmark.

The stock limits means the pair could, if they wanted, put even more into Royal Dutch Shell (RDSb) as it repairs its dividend from last year’s historic cut and benefits from the recovery in oil prices as the world reopens after coronavirus lockdowns. Shell is currently Claverhouse’s top holding at 5% of assets, nearly double the index exposure.

More likely, the duo could use the removal of a limit on underweights to disinvest from beer to spirits group Diageo (DGE) altogether. The Guinness owner made up just 1% of the trust’s assets at the end of April, compared to the current 3.3% weighting in the index.

‘We believe the ability to not hold some of the larger index stocks, where the manager has a negative view, makes sense and will make it clearer that the managers have the ability to express their conviction views, albeit it is not expected to have a large impact on the portfolio,’ said Numis Securities analysts.

JCH shares were unchanged at 750p. They have risen 26% in the past six months, more than double the gain in the FTSE All-Share. Longer-term, Claverhouse has delivered a ten-year total shareholder return of 148%, beating the 124% average of trusts in the AIC UK Equity Income sector and the 93% advance in the FTSE All-Share.

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