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The asset manager is targeting quality companies with real growth potential beyond the usual FTSE 100 names
Thursday 29 Nov 2018 Author: Steven Frazer

A new UK income fund has thrown its hat into the ring as investors search for reliable and regular dividend-paying investments. Octopus Investments will launch FP Octopus UK Multi Cap Income Fund on 10 December, targeting a 4% annual yield with dividends to be paid quarterly for the convenience of investors.

UK income is already a very crowded space in the funds world, so new products need to have something special about their investment process to stand out from the crowd.

Octopus has a reputation as a small cap and venture capital trust expert, so launching a multi-cap income product seems a peculiar next step for the asset manager.

Fund manager Chris McVey argues that the existing investment strategy of Octopus will only need to be tweaked, because it will rely largely on ‘the same bottom-up process’, with a small and medium-sized company bias.

‘We will be able to leverage the skills across the team,’ says McVey who will run the day-to-day operations of the fund, with 20-year small cap investment veteran Richard Power providing additional advice.


McVey and his Octopus colleagues fundamentally believe in the long-term growth potential of the UK stock market, and they hope to stand out from the UK income crowd by addressing the herd mentality of the wider fund management industry.

‘We think there are concentration problems in the UK equity funds space, with most managers wanting to own stakes in a relatively small number of stocks.’

According Octopus just 10 stocks represent 54% of forecast FTSE 100 dividend payments for 2018, and almost three quarters of traditional income funds hold these stocks.

These include household names such as oil giants BP (BP.) and Royal Dutch Shell (RDSB), telecoms group Vodafone (VOD), utility firm National Grid (NG.) and some of the high street banks.

That’s not to say that the new Octopus income fund will ignore these income giants entirely, but it wants to provide investors with access to a wider pool of investment opportunities and the faster growth in earnings and dividends demonstrated by small and mid-sized companies.

Sticking to the Octopus stock selection knitting means McVey will concentrate on what he perceives to be ‘high quality businesses with real, long-term growth potential being run by very good management’.

Octopus says it will blend some of the UK’s largest and most profitable companies with those mid and smaller sized companies with ‘hidden potential to provide superior returns’.

The asset manager adds: ‘It’s our knowledge and expertise of these under-researched smaller companies that make the fund distinctive and complementary to many of the other UK equity income funds which focus far more on larger companies.’


The fund launch has not come out of the blue. The Octopus team has been running a draft income portfolio for more than two years and McVey already has a good idea of some of the stocks he wants in the portfolio.

Chief among them is Scottish broadcaster STV (STVG), which last month inked a four-year strategic partnership with Virgin Media north of the border regarding high definition regional programming.

Regularly mooted as an acquisition target for larger peer ITV (ITV), STV will have doubled its dividend since 2015, presuming it comes good on this year’s anticipated 20p per share payout.

In 2019 analysts predict that the company will lift the dividend by an inflation-busting 5%, implying a 6.3% yield for investors over the next 12 months.

Other names cited by McVey as stocks with the right characteristics for potential inclusion in the Octopus fund include affordable housebuilder MJ Gleeson (GLE) and cinema operator Cineworld (CINE), which trade on prospective 2019 income yields of 5.2% and 5% respectively.

Early bird investors can benefit from a discounted annual management charge of 0.3% that will mean an ongoing charge figure (OCF) just 0.45%. But this is limited to within the first year and only until the fund’s total capital hits £50m. After that OCF reverts to 1.26%.

The OCF reflects how much of an investment is eaten away by running costs. For example, if a fund has an OCF of 0.5%, then for every £1,000 you invest, £50 goes on costs, such as fund manager fees for running the portfolio, administration, marketing and regulation.

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