Full steam ahead
In growth terms, the Aim market had fallen off over the past 12 months, before beginning to ascend again from mid-February.
Chelverton fund manager David Taylor dismisses fears that the small and mid-cap space could be running out of steam.
“I think this year will be similar to last – a game of two halves,” he says. “The first part of last year, small and mid-caps were not doing particularly well because people were worried about the elephant in the room, which was the UK general election.
“Once that was out of the way they did well for the rest of the year because the economy was doing OK. What small and mid-cap share prices really don’t like is uncertainty.
“While companies are actually trading quite well – and, importantly, dividends are coming in ahead of expectations in this arena – the reason we are not performing as well as we should this year is Brexit.”
Alongside what might be considered typical measures in assessing a company’s future success – cashflow, strength of balance sheet, growth prospects – Taylor and co-manager David Horner also pay close attention to the propensity of its directors to take dividends.
Taylor says: “Some directors understand the importance of dividends in rewarding and attracting shareholders, while others think the cash is their own.
“We like companies that are serial dividend payers. We also need to be sure the dividends are being paid out of genuine excess cashflow. We don’t want dividends paid out of growth capital, because even the duller companies need to reinvest to grow. Today’s capital expenditure is your dividend in three or four years down the line.”
In a defensive move, Taylor has actually sold out of lower-yielding names, such as contractor VP, retailer WHSmith, plastics firm RPC and tech business Micro Focus. Instead, the fund has invested in van hire firm Northgate (4% yield), retailer McColl’s (7%) and Regional Reit (7%). The fund has also benefited from unexpected special dividends this year from the likes of Shoe Zone and Headlam, the later having also raised its underlying dividend by 18%.
Another small and mid-cap focused vehicle, Unicorn UK Income (historical yield 3.8%), has also benefited from special dividends this year from Headlam, as well as paving manufacturer Marshalls and IT services provider FDM Group.
“From looking at forecasts and at some of the dividend policies of certain companies, I don’t think they will be the only three offering specials this year,” says manager Simon Moon, who runs the fund alongside Fraser Mackersie.
“On top of growth on the underlying dividend, we’ve seen some upside. Yield will be an issue and a challenge for us but from what we have seen through the results season we have been pleasantly surprised by companies returning cash to shareholders.”
Unicorn has been buying into Lavendon Group and Interserve, while having also recently initiated a position in Greene King.
“It acquired Spirit and we think opportunities there from the combined group are more than the share price is giving it credit for,” says Moon. “Greene King has a fantastic long-term dividend record but there are also some near-term opportunities in consolidating the two pub groups.”
