The 10 biggest UK Equity Income funds manage 66.25 per cent of all the money invested in the sector, according to data from FE Analytics, and all invest in similar large cap stocks.
FE Trustnet has previously published research showing that a large proportion of funds in the sector are investing in the same stocks – which is at least partly due to the fact that a high proportion of the dividends in the UK come from a small number of large companies.
Some commentators, such as FE Alpha Manager John McClure, point to the similarity of the holdings in these funds as something investors should be wary of, while others, such as adviser Philippa Gee, warn investors to diversify the sources of their income.
In light of all this, investors looking for a core equity income fund must be asking themselves which one they should choose.
Here, the experts answer that question:
Invesco Perpetual High Income/ Invesco Perpetual Income
Darius McDermott (pictured), managing director of Chelsea Financial Services, says that the biggest name in the industry with the biggest funds in the country should still be the first port of call for income investors. "We have had Invesco Perpetual High Income on our buy-list for 20 to 25 years and we are long-standing supporters – and for the right reasons," he said.
"With the High Income fund, what it tends to do more than the other funds in the sector is really protect capital."
Invesco Perpetual High Income recently celebrated its 25th year in existence and data from FE Analytics shows that it has made 1,936.97 per cent since this time.
Over the past decade it has made 239.31 per cent while its sector is up 148.93 per cent.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
McDermott is unconcerned about the size of the fund and also about Woodford’s more modest performance in recent years.
While Invesco Perpetual Income and High Income were both top-quartile performers in 2008 and 2011, they produced fourth-quartile returns in 2009, 2010 and 2012, the years when the market rallied.
McDermott says this is down to the more defensive bias of the funds and is nothing to be concerned about.
"Luckily we have 20 years of history to look back on so we can see Neil has a strong track record in both up and down markets," he said.
However, some advisers have started to look elsewhere.
Chris Spear, managing director of Spear Financial Services, said: "Out of the really big funds I have gone in the Neil Woodford direction, although I have to say that it’s not going to satisfy ethical investors because his funds are full of tobacco."
"However, I tend to use the Invesco Perpetual Distribution fund more these days and Invesco Perpetual Monthly Income Plus, both also managed by Woodford. I like Invesco very much but I am starting to worry about the size of the Income and High Income funds."
"I am concerned that Neil has to run a fund in a different way from most fund managers. He has to work with the management of his companies – he’s a major shareholder so rather than selling when things go wrong he has to get involved."
Jason Hollands, managing director at Bestinvest, says that he no longer uses Woodford’s funds for new investors, for similar reasons.
"We just feel that liquidity must have been impacted on the fund. It still has a "buy" rating but for now we prefer funds that are smaller for new clients."
The funds are currently below-average yielders in the sector, at around 3.6 per cent.
Artemis Income
McDermott also rates Adrian Frost and Adrian Gosden’s Artemis Income; at £4.7bn it is the next biggest portfolio after Woodford’s duo.
"I would say that Neil is very much more thematic- or macro-driven while Frost and Gosden are more bottom-up in their approach," he said.
"When we went to see Frost last year he said 'I am not as defensive as Neil', and this seems to be the major difference."
"Neil has a big position in pharmaceuticals, which is a defensive sector, but he holds them because he thinks they are good companies rather than out of a desire to be defensive. So I would say they are both proven managers who do things in a similar way."
Artemis Income is another consistent top-quartile performer in the sector. It is currently yielding 4.2 per cent.
Halifax UK Equity Income
This portfolio has a total of £2.8bn in assets under management, making it the next biggest in the sector; however, it has just one FE crown and is bottom quartile over three, five and 10 years.
McDermott says it is a fund that is distributed through Lloyds and Halifax, which explains its size. It makes regular appearances on his sell-list, and McDermott advises investors to avoid this one.
It is currently yielding 4.1 per cent.
Newton Higher Income
Newton Higher Income, which currently has £2.2bn in assets under management, was until recently run by Tineke Frikkee. Richard Wilmot has recently taken over and changed the mandate.
McDermott said: "That fund only went for the high-yielders and wouldn’t pick stocks unless they were yielding a 15 per cent premium over the market. It got pushed into stocks that got smashed, like the banks."
"We used to have that fund on our buy-list but took it off when we decided it was one that did very well and very badly in different periods, whereas we are looking for consistent performance."
Spear added: "Newton have very good equity income managers, but I tend to use them globally rather than in the UK."
"The mandate used to be just to grow dividends, but I think they lost sight of capital preservation and growth."
Newton Higher Income is currently yielding 5.13 per cent, which is lower than it has been historically.
Wilmot has brought down the yield in order to improve the fund’s ailing total return record; according to FE data, it has underperformed its sector and All Share benchmark over three, five and 10 years.
Jupiter Income
This £1.9bn fund was run by industry veteran Anthony Nutt until last December, when it was taken over by Ben Whitmore.
The fund had slipped into the fourth quartile over three and five years and has underperformed its sector average over 10.
However, its underperformance followed the financial crisis, which it still has not fully recovered from.
Data from FE Analytics shows that it outperformed in the boom years prior to the crash; Jupiter is hoping that a change of management will revitalise the portfolio.
Performance of fund vs sector over 10yrs
Source: FE Analytics
McDermott says he rates Whitmore highly and is considering adding the fund back onto his buy-list.
"We have lots of historic money in Jupiter Income, it was unfortunate that Nutt had three or four years of underperformance."
"However, we have already seen Ben Whitmore and we rate him for his performance on the Jupiter Special Situations fund – although it’s a very different type of fund – and we are putting a buy-rating on it."
The fund is currently yielding 4.3 per cent.
Threadneedle UK Equity Income
Both Hollands and Spear picked this £1.7bn fund as their favourite giant fund in the sector.
Spear said: "I love it and the Threadneedle UK Equity Alpha Income fund too, in which they cut down the number of stocks."
"The ordinary one is less focused and less risky. However, you rarely find a private investor with a share portfolio of fewer than 30 stocks, so I’m not sure it’s too much of a risk."
"Leigh Harrison is under-rated. I think he and his team have done very well and will get more business in the future."
Hollands said: "A couple of the funds have buy-ratings but our strongest conviction is the Threadneedle UK Equity Income fund. Really this is down to the strength of the management team."
McDermott rates this fund but prefers the more concentrated Alpha fund, which is only £334m in size.
Threadneedle UK Equity Income, which is currently yielding 4 per cent, has five FE Crowns.
All funds in this piece are available to retail investors, with a minimum investment of £1,000 at the very most.
Is your core UK Equity Income holding different to those mentioned above? If so, tell us which, and we'll take a look at it in more detail at a later date. Leave a comment below, or email us at editorial@financialexpress.net.