Equity markets have performed well this year, which has contributed to waning yields across the board. Our data shows that the average dividend yield on the FTSE All Share has fallen from 3.71 per cent in May 2012 to 3.26 per cent this year.
Funds in the IMA UK Equity Income sector have followed suit: the average fund in the sector had a headline yield of 4.47 per cent 12 months ago, which has fallen to 4.03 per cent.
Gleeson says investors tend to obsess over the level of yield on a fund even though the amount of income they receive could stay the same – or even go up.
"The headline yield is important on the day you buy it; however, if the published yield has dropped, that can mean that you are just receiving the same amount of income from a bigger pot," he explained.
"A fund’s yield is a percentage snapshot in time of the level of income paid out per unit. Therefore the yield could drop as the price of the underlying assets increases."
Gleeson says the main point of emphasis should be put on funds or stocks that can increase the amount they pay out over time.
"The interesting point about yield is that growth funds can be very good for income investors," he said.
"They may have a low headline yield of 1 per cent; however, if they are growing that by 10 per cent each year, investors will be seeing a good level of income. I think there is a little too much obsession over yields."
"When building an income portfolio, you may want assets that can give you high yield now, but you also want something that can grow its income."
"If you just focused on high-yielding funds that have no capital growth, that income will erode over time because of inflation," he added.
FE data shows that the five crown-rated Cazenove UK Equity Income fund has seen its yield drop by 50 basis points to 3.8 per cent over the last year.
However, that coincides with a £254.5m increase in assets under management over the last 12 months, as a result of strong inflows and strong performance.
The now £334m fund has actually increased the amount it has paid out to its investors over the period, even though its yield has dropped.
Cazenove UK Equity Income’s net distribution per unit increased from 2.27p in February 2012 to 2.39p a year later.
The portfolio, which is managed by Matthew Hudson, is a top-quartile performer in the IMA UK Equity Income sector over one year, with returns of 38.57 per cent. It has also comfortably outperformed the FTSE All Share over that time.
Performance of fund vs sector and index over 1yr
Source: FE Analytics
Cazenove UK Equity Income has an ongoing charges figure (OCF) of 1.62 per cent and requires a minimum investment of £1,000.
Adrian Lowcock, senior investment manager at Hargreaves Lansdown, also believes that focusing too heavily on yield is one of the biggest mistakes investors can make.
"The key to equity income as an investor, and very much for a fund manager, is that you should not just be chasing yield," he said. "Newton Higher Income is a good example, and that was a fund that became a victim to it."
The £2.3bn Newton Higher Income fund cut its dividend back in 2011, following a sustained period of underperformance.
Richard Wilmot took over as manager in December last year and cut the strict yield target of 5.5 per cent.
The yield of the fund has fallen to 4.65 per cent, but total return performance has improved significantly.
Performance of fund vs sector and index over 6 months
Source: FE Analytics
FE Alpha Manager Jan Luthman's Liontrust Macro Equity Income fund is another portfolio that has seen its yield drop in the last 12 months, from 4.77 per cent to 2.98 per cent.
He says that the actions of central bankers have been the biggest driver of declining yields.
"An underlying contributor to the overall decline in yields may well be the fact that share prices are being driven up more by the effect of quantitative easing than by a recovery in economic growth and increasing corporate profits," Luthman said.
"In the UK, QE has been focused almost exclusively on the purchase of gilts – those who have sold gilts reallocate elsewhere, and the impact ripples out through financial markets, driving up the prices of financial assets."
"Meanwhile, growth in corporate profits and dividends remains relatively anaemic, hence the decline in yields," he added.
With regard to the Liontrust Macro Equity Income fund’s drop in yield, Luthman says that the level of income it has paid out has remained the same.
"Clearly markets have risen, but one of the major reasons why our published yield has come down is because the 2012 yield took into account a special dividend we received from International Power in 2011, which is now history," he explained.
"Within our fund, we have an income tailwind this year, in so far as some 80 per cent of the earnings of our portfolio are derived from non-sterling regions of the world, against the currencies of which sterling has declined."
"That means that, in sterling terms, those earnings have been boosted by around 5 per cent since the beginning of 2013," he added.
CF Miton UK Multi Cap Income is one of only nine funds that has maintained or increased its headline yield over the last year. It used to be 3.48 per cent and is now 4.46 per cent.
Manager Gervais Williams says this increase is as a result of the fund’s relatively young age, given that it was only launched in October 2011.
This, he says, illustrates the importance of looking beyond headline yields.
"I think that during the first year, it took some time for the correct yield to be published," he said.
"The 3.48 per cent figure seems too low to me and that’s why it appears to have grown so much over such a short time."
"Certainly, we recycle the portfolio so that when our assets have gone up like they have, we can buy more income," he added.
Over the last year, the £72.1m CF Miton UK Multi Cap Income fund has returned 37.53 per cent, putting it in the top quartile of its IMA UK Equity Income sector.
Performance of fund vs sector over 1yr
Source: FE Analytics
The fund requires a minimum investment of £1,000 and has an OCF of 1.77 per cent.
