Aviva UK Listed Equity Income: August 2024 fund update

• Lead manager Kunal Kothari joined Aviva from Colombia Threadneedle in February 2024

• The fund aims to generate a combination of income and growth over the long term

• The fund has performed better than the FTSE All Share index over the last year

• This fund does not feature on our Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The Aviva Investors UK Listed Equity Income fund aims to generate a combination of income and growth over the long term. This includes a target to deliver an income greater than the FTSE All Share index over rolling three year periods, and a greater total return over rolling five year periods. The fund could form part of an income focused portfolio, or part of a broader portfolio looking to add investments in UK companies.

Manager

The fund is managed by Kunal Kothari, supported by Trevor Green on an interim basis.

Kothari joined Aviva Investors in February 2024 to become lead manager of this fund, he also has lead analyst responsibilities for the consumer discretionary sector. Kothari started his career at Schroders and subsequently worked at Santander Asset Management, Merian Global Investors and Colombia Threadneedle on UK strategies.

Green is Head of UK equities at Aviva and also has sector coverage responsibilities for IT & Communication Services. Green started his career at Capel Cure Myers before also spending time at Credit Suisse Asset Management and New Star Asset Management.

Process

The managers target generating an income of more than the FTSE All Share index, alongside capital growth over the long term. They do this through investing in companies they believe are of a good quality, trading at an attractive price, and have the potential to pay a growing dividend over the long run.

They look to invest in 40-60 companies with predictable, stable cash flows that could deliver capital growth and income through the market cycle. Lots of these are large companies, many with global operations. That means their success can depend on the state of the global economy, not just how well the UK does. The managers also invest more than the index in medium-sized companies, which have the potential for higher growth but can add risk compared to their larger counterparts.

Since becoming manager of the fund, Kothari has made some changes to its investments. He’ s increased the fund’s investments in areas like energy, banks and pharmaceutical companies and reduced allocations to financial services, utilities and insurance businesses. New positions in the fund have included the likes of retailers Pets at Home and Dunelm and hospitality business Whitbread.

Culture

We think the culture at Aviva is a collegiate one with lots of support and collaboration from investors around the business. Managers enjoy and can make use of the resources that come with being part of a large organisation. Fund managers are rewarded based on one and three year performance, and bonuses are paid out over a period of time, which encourages a long-term commitment to both unit holders and the parent company. Managers are rewarded in Aviva shares as well as cash, which we like as it signals a commitment to the firm which is positive for investors.

ESG Integration

Aviva is widely recognised as a leader in responsible investment. It was a very early adopter of the Principles for Responsible Investment and Environment Social and Governance (ESG) is deeply embedded in the firm’s culture and investment decision making. They have a team of more than 30 ESG analysts who produce ESG research to assist fund managers and maintain the firm’s proprietary ESG scoring tool.

The firm monitors, engages with, and, where appropriate, intervenes, on matters than can have a material impact on the long-term value of their clients’ investments – issues such as board diversity, human rights abuses and greenhouse gas emissions.

The rationale for each vote against management or abstention is made public in a voting history report, updated monthly, and engagement case studies are available throughout the website. The firm also produces a significant number of detailed and thought-provoking articles on various ESG-related topics.

Aviva offers a range of funds that aim to meet the needs of responsible investors, including a sustainable transition fund range linked to the United Nations Sustainable Development Goals (SDGs). While this fund isn’t part of this range,we think ESG risks are considered as part of the investment process. All Aviva Investors funds exclude weapons, tobacco, UNGC violators (unless structured engagement is ongoing) and thermal coal, arctic oil and oil sands producers (unless they have a Science Based Target aligned with a ‘well below 2°C by 2050’ scenario.

Cost

This fund has an ongoing annual fund charge of 0.81%, but a discount of 0.32% is available for HL investors, which reduces the charge to 0.49%. The saving is achieved through a loyalty bonus which may be taxable if the fund is held outside of an ISA or SIPP. The HL account charge of up to 0.45% per year also applies, except in the HL Junior ISA, where no account charge applies.

Please note that charges are taken from capital, which could boost the income, but reduces potential for capital growth.

Performance

Over the last 10 years, the fund has performed marginally better than the index, delivering returns of 85.81%*, ahead of the FTSE All Share’s 83.93% return. However, as Kothari only joined Aviva in February 2024, most of this performance is attributable to the fund’s previous managers. Past performance is not a guide to the future however, so there are no guarantees.

Over the last year, the fund has delivered returns of 16.84%, ahead of the 13.54% return from the FTSE All Share index. Our analysis suggests that over this period, the fund’s investments in industrials and financials businesses have been among the largest contributors to the fund’s performance. On the other hand, the fund’s underweight exposure to energy companies compared to the benchmark and its exposure to utilities proved to be headwinds for performance.

At the time of writing, the fund yields 4.10%. Income isn’t guaranteed, and yields aren’t a reliable indicator of future income.