Overview

Stephen Timoney
Investment Management

What is it?

A directly invested, segregated portfolio service that aims to provide a growing dividend income, as well as long-term capital growth, by investing in UK mid cap companies.

Why Killik & Co?

Whereas many unitised funds hold hundreds of individual stocks, the Mid Cap Equity Service avoids excessive diversification in favour of more focused portfolios, which typically comprise only 15-25 of our very best UK mid cap ideas.

The service aims to achieve a dividend yield that is greater than that of the FTSE 250 Index, and income can be paid out directly on a smoothed monthly basis, or reinvested.

Who is it right for?

The Mid Cap Equity Service is aimed at anyone seeking both income and capital growth, and who would like to gain exposure to companies listed on the FTSE 250 Index. We would guide clients towards a minimum investment of £40,000.

Investment Process

The Mid Cap Equity Service is managed according to a disciplined investment process, which focuses on companies within the FTSE 250 Index that have the following characteristics:

EASY-TO-UNDERSTAND BUSINESS

We favour companies with relatively simple business models, and products or services that we understand and, in many cases, use ourselves. In our experience, focusing on straightforward businesses, that we can get to know well, helps build the strength of conviction that is essential for long-term investing.

STRONG AND SUSTAINABLE COMPETITIVE ADVANTAGE

We look for companies that have a sustainable ‘edge’ – based on brands, ‘sticky’ customers, or cost advantages, for example – that will give them the best possible chance of staying ahead of the competition, and protecting their above-average profitability.

CLEAR STRATEGY FOR GROWING EARNINGS

In the long run, earnings growth drives both dividend and capital growth. As well as being able to pay a sustainable dividend, therefore, it is important that our companies have a long-term strategy for the profitable reinvestment of retained earnings.

CONSISTENT CONVERSION OF EARNINGS INTO CASH

Earnings, or accounting profits, are based on the ‘accrual’ method of accounting, by which income is recorded when earned and expenses when incurred, not when cash actually changes hands. In order to gauge potential dividends – also known as free cash flow – to shareholders, we pay close attention to how consistently the company can convert its paper profits into cash.

PROVEN WILLINGNESS TO RETURN CASH TO SHAREHOLDERS

It is not necessarily the case that potential dividends are, in practice, distributed to shareholders. Sometimes, free cash flow is squandered on value-destructive acquisitions or simply hoarded on the balance sheet at the discretion of company management. We believe that a proven commitment to regular dividends imposes discipline on corporate strategy, and encourages sensible allocation of capital.

ATTRACTIVE DIVIDEND YIELD

We aim to achieve a dividend yield that is greater than that of the FTSE 250 Index, but without compromising the overall growth profile of the portfolio. This means we avoid the high dividend yields associated with companies in the mature phase of their corporate life cycle, whose rates of reinvestment – and, therefore, growth – tend to be lower.

REASONABLE VALUATION

The value of any company is the present value of its future cash returns to shareholders. We estimate the value of our portfolio companies by carefully analysing historic financial statements and, based on our understanding of the individual businesses, projecting free cash flow – or potential dividends – into the future. We regard a valuation as reasonable if we can be confident we are not significantly overpaying for the future cash returns we expect.

RELATIVELY LOW SHARE PRICE VOLATILITY

We believe that the shares of stable, established companies that are conservatively managed should be less volatile than those of more speculative ventures. The so-called ‘low-volatility anomaly’ refers to the tendency for low-volatility stocks to produce higher risk-adjusted returns than high-volatility stocks over time.

Risks to be Aware of

Investing in mid cap companies may carry a higher degree of risk than investing in the shares of large cap companies, such as those in the FTSE 100 Index.

The actual risk of your individual portfolio will depend upon a combination of market risk and stock-specific risk, which can be mitigated by the portfolio manager through diversification. Portfolios, however, will be concentrated in a relatively small number of stocks (typically 15-25) and may have high exposure to a particular sector.

We would generally recommend that, overall, an investment into this service should not represent more than 20% of an otherwise well-diversified portfolio.

Please note that the value of your investments may rise and fall over time, and that past performance is not a guide to future performance. You must be comfortable in the knowledge that you may receive less than you originally invested.

Find Out More

Contact us on +44 (0) 20 7337 0777 or send us an email at info@killik.com to find out more about our Mid Cap Equity Service or alternatively fill out the form below to download the brochure.

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