Nick Millington, manager of the Aberdeen UK Equity Enhanced Index fund and Aberdeen’s head of systematic index solutions, discusses outperforming the FTSE All Share, attractive UK dividend yields and the pros and cons of following a systematic process.
The Monday Manager series covers fund managers that have worked on their fund for over three years, and where fund assets are over £100m.
Can you explain the fund’s approach to investment and what it is trying to achieve for investors?
The UK Equity Enhanced Index fund is designed to target consistent outperformance of the FTSE All-Share benchmark, net of fees, within a tightly controlled risk budget. We aim to give investors broadly the risk and sector profile of the UK market, but with a systematic tilt toward stocks exhibiting characteristics that have historically been rewarded over the long run, most notably valuation, quality, and momentum.
In practice that means clients get index-like exposure to UK equities at a cost much closer to passive than to traditional active, with a disciplined, repeatable process that aims to generate the additional return. The objective is not to take big, concentrated bets but rather to compound reliable diverse sources of outperformance over time.
What are some of the biggest headwinds and tailwinds for UK equity investors? How is this reflected in the portfolio?
The clearest tailwind remains valuation: UK equities continue to trade at a meaningful discount to global peers on most multiples, and dividend yields are among the most attractive in developed markets. The sector composition of the UK index, particularly energy, financials, healthcare, and consumer staples, also offers genuine cash-generative quality that is increasingly scarce elsewhere.
On the headwind side, persistent outflows from UK-focused funds, subdued domestic growth, and ongoing questions around the long-term relevance of the London listing venue all weigh on sentiment.
See also: Covered: The renaissance of the UK market
Because we are benchmark aware, we don’t take outright views on the UK market itself. Clients allocate to us for UK exposure. What our systematic process does do is lean into the stocks where these tailwinds are most reflected in fundamentals that the market rewards over time: companies that are cheap on multiple valuation metrics, demonstrate balance-sheet and earnings quality, and show positive price and earnings momentum. That tilt is implemented in small, diversified positions across the universe rather than concentrated bets.
There has been a lot of rhetoric about reducing costs for the end investor, following increased regulatory burden and poor active performance. How does ‘enhanced index investing’ help to mitigate this?
Enhanced indexing sits deliberately between passive and traditional active, and it is designed to address exactly this problem. Investors increasingly want the cost discipline of passive but are reluctant to give up the possibility of outperformance. Because our process is systematic and rules-based, it scales efficiently: we can run substantial AUM without the cost base growing proportionately, and we pass that efficiency on through fees that are lower than typical active management charges.
Crucially, the process is transparent and repeatable, so clients understand precisely what they are paying for: a clearly defined source of return potential on top of benchmark exposure.
What are the pros and cons of following a systematic process, as opposed to something entirely ‘bottom-up’, company-by-company?
The advantages of a systematic process are breadth, consistency, and discipline. We can evaluate every stock in the investment universe, every day, free from the behavioural biases of overconfidence, anchoring, and narrative-driven decision-making that could affect even the best fundamental analysts. Risk is controlled at the portfolio level by construction rather than after the fact, and this is applied consistently through time as the market presents new opportunities and risks.
The trade-off is that a systematic model may be slower to react to genuinely novel stock specific situations, such as a strategic restructuring, a regulatory shock, or a step-change in a company’s business model, that a fundamental analyst sitting in front of management might pick up earlier.
However, we address that by avoiding concentration in any single stock position and by combining factors that capture multiple aspects of company behaviour. We see systematic and bottom-up as complementary philosophies rather than competing ones. They can add value at different times, in different ways and products and in different parts of the cycle.
How did you enter into the world of investing?
At school I was always interested in the financial world – it was ever changing and I thought required an analytical mindset to try to solve a multi-dimensional, time varying problem – and I liked maths but in an applied way.
However, it wasn’t until my final year at university that I got a glimpse into the reality of markets via a tutor who had worked on the London Metals Exchange. Henceforth, I applied for grad programmes at investment banks and asset managers and ended up in a great role on the buy side.
I learned everything from cash reconciliations to data management and derivative-based TAA. I think that broad grounding taught me the devil is always in the detail and that includes the operational side. Possessing investing insights is one thing – having the courage and confidence to put them into action is another.
What is the best piece of investment advice you have ever been given?
Average in. This is about accepting that perfect market timing is very difficult, so it’s helpful to invest incrementally through time to receive the benefit of some return for taking some risk. Not investing, that is, not taking any risk, perhaps while you wait ‘for the right time’, is an active investment decision that is often under appreciated.
