AXA Framlington Equity Income Income Units

We met with George Luckraft, the manager of both the AXA Framlington Equity Income and the Monthly Income Funds. The funds have under performed against the peer group recently and we wanted an update on how they have been positioned.

George Luckraft admitted that his prediction for the movements in interest rates had been wrong. Although they have reduced since the beginning of the year this has not been as far or as fast as he expected. This has been detrimental to some of the stocks he holds, in particular those affected by consumer spending. Inflation has risen and interest rates have remained around the same level. The public have curbed their spending. Stocks like the car retailer Pendragon, which the manager holds, have suffered as a result.

Some other stocks he holds have also under performed due to economic issues. For instance, SIG, the roofing and insulation specialist, and Speedy Hire, the tool hire company, have both been marked down due to concerns over the slowing housing market.

One of the main hinderers of performance has been the funds’ exposure to smaller companies. Generally these have significantly underperformed larger firms over the last year. These funds have a much higher exposure to smaller companies than the average fund in the UK Equity Income sector, which helps account for why the fund has performed worse than the peer group.

George Luckraft remains positive in his outlook, in particular the potential for dividend growth. Some of the stocks in the portfolio that have been marked down now offer exceptional yields. Pendragon, for example, now yields 14%, which is way ahead of his expectations.

His outlook is so positive he has recently invested more of his own money in the funds. He believes there is excellent value in the market and now is an opportune time to invest.

There is an inherent danger with making fund management decisions based on your view of the economy. If you get it wrong the fund suffers, regardless of the quality of the underlying companies. This seems to be what has happened to George Luckraft recently. We would, however, be unwilling to write off him off at this stage.

All managers will go through periods of under performance from time to time, and it is important to remember that in the past he has produced extended periods of superb performance. In our opinion investors in these funds should continue to hold and both funds will remain in the Wealth 150, a list of our favourite funds in each sector.