The fund is overweight large-capitalisation stocks, although this is a structural position, rather than responding to the current market environment. Clark says: “One of the fund’s main purposes is to generate income. If you want reliable income, large, liquid, highly profitable companies are often the best place to get it. In smaller companies, there can often be greater doubt over the progress of the dividend.” He does hold some mid-cap exposure, however.
If not high valuations or rising interest rates, what worries him most about the current market environment? He says: “Most things you can never know. I am not an expert on China but I assume it will continue to grow for a reasonable period and I do not think it is a major problem for the UK market.
“In fact, exporting deflation might be good for Western economies.
“I am worried about what happens to politics in Europe. It is increasingly up in the air. Will there be a referendum on Europe? How much uncertainty will that create?”
Risk research
In the meantime, Clark aims to manage risk through thorough research. He says: “We spend a lot of time looking at these companies and trying to understand them. Our team of analysts will prepare a financial forecast and write on the investment case.
“We like to meet management because it is an opportunity for them to tell us what their plans are and what they are trying to achieve. It is a chance for them to open up.
“What we are looking for is a company we can understand. We want to ensure our projections have credibility. We want to invest in good quality companies at a fair price with an income that grows.
“‘Safety of income at a reasonable price’ is our mantra. We do not want to lose money and we want our income to grow, and we are happy to pay a fair price for that.”
Total return
In judging relative valuations, Clark believes it is not always helpful to focus on a simple price-to-earnings ratio but instead to take a more total return perspective.
This means calculating what they would receive if they bought the stock and held it for five years, including the dividend payouts.
This approach has brought steady, if unspectacular, outperformance. The fund is up by 62.9% over five years, compared with an average of 59.2% for the wider IA UK Equity Income sector. However, markets have been benign for much of that period and the fund has a track record of doing better during falling markets.
For example, in 2011, the average fund in the sector fell by 2.9%, while the Moneybuilder Dividend fund was up 7.5%. The fund has also paid a growing dividend and currently yields 4.05% (all figures: Financial Express to 14 September).
For Clark, valuation is important but not at the expense of quality. The recent rout has made a number of stocks look very cheap but not necessarily more appealing.
For those wishing to defend capital and pay an income, he believes areas such as consumer staples, utilities and pharmaceuticals may yet prove more reliable than delving into unloved commodities.
