The £1.4bn Troy fund has been moved from a buy in 2013 to a hold this year, while Artemis has been moved from a buy to a sell. The mediocre five year performance of the two funds – which no longer includes the down year of 2008 – is given as the reason for both downgrades.
“It is with heavy hearts that we initiate a sell on Artemis Income,” said the study from the wealth manager.
“We have long been supporters of Adrian Frost and Gosden and they have regularly featured in client portfolios.”
“However, our job on the income study is to remain unemotional and allow the process to speak for itself.”
Sanlam uses a pure quantitative approach to rating funds, looking at five-year income, total return and volatility data. The funds are split into three groups – the White, Grey and Black Lists – and then given a buy, hold or sell rating.
“Due to unexceptional returns over the last five years, the fund is falling down the Grey List and investors should therefore consider alternatives,” the study continued.
Sanlam was slightly more forgiving when it came to Trojan Income, but signalled that it is likely to downgrade it further unless there is an improvement in performance.
“The team at Troy have set out their fund’s proposition as one that will perform better in volatile/weaker markets – certainly not the case over the past five years, or 2013,” Sanlam said.
“Considering the long-term track record, and the balance this portfolio can bring to investors, we suggest a hold, although we are monitoring the holding closely.”
FE data shows that both Artemis and Troy have fallen behind their IMA UK Equity Income sector average and FTSE All Share benchmark over a five-year period, though with returns of around 100 per cent, investors holding these funds over the timeframe are unlikely to be overly concerned.
Performance of funds, sector and index over 5yrs
Source: FE Analytics
Brooke is also behind over one year, though he and Frost are ahead of the All Share and their sector over three years.
Although both the Artemis and Troy funds have been consistently less volatile than their sector and benchmark – particularly Trojan Income, which has one of the lowest annualised volatility scores of any fund over three and five years – this wasn’t enough for Sanlam.
Both funds are yielding around 3.8 per cent, which is a touch above average for the UK Equity Income sector, and have a strong and consistent dividend distribution level in recent years.
Income earned (£) from a £1,000 investment over 5yrs
Source: FE Analytics
FE Research, headed up by Rob Gleeson, continues to rate Artemis Income and Trojan Income very highly. Artemis Income has a buy-rating and is a member of the FE Select 100, while Trojan Income is currently a hold, but only because it has closed to new money, and is only available on certain platforms.
The team believes that the funds’ consistency and stability make them a perfect fit for certain investors, even though they have fallen behind from a total return point of view in recent times.
“Artemis Income is ideally suited for investors who want to receive a predictable income stream through holding UK equities. Frost and Gosden have a cautious approach and only invest in the largest companies in the FTSE that can provide an above-average level of income,” said the team.
With regard to Trojan Income, the team added: “Brooke says that the fund is a bit boring, which is not a problem if it means steady returns and low volatility. He does not look for tremendous performance in market rallies, but is more concerned about preserving investors’ capital in real terms, adjusted for inflation – a foundation of Troy’s investment process.”
“The only worry would come from a change in the global economic climate, as the manager would have to alter his stance to benefit from a strong recovery. Brooke does not think this is likely to happen soon, however, and he is not alone in this regard.”
Gleeson and his team rate funds using both quantitative and qualitative analysis. FE Alpha Manager and FE Crown Fund Ratings consider risk-adjusted performance in both rising and falling markets, while the fund choices from the AFI – a panel of financial experts – also play a role.
The FE Alpha Manager rating considers the track record of a manager’s entire career rather than five years, which also goes to explain the differences in its rating of Artemis Income and Trojan Income compared with Sanlam.
According to FE Analytics, both Artemis Income and Trojan Income are top quartile performers since Frost and Brooke started running them, respectively. Since Setember 2004 when Trojan Income was launched, they have both beaten the All Share and IMA UK Equity Income sector average, with less volatility.
Performance of funds, sector and index since Sep 2004
Source: FE Analytics
Artemis Income is also a top-quartile performer over a 10-year period.
Among the other funds that suffered a downgrade in the latest Sanlam rebalancing were Aviva Investors UK Equity Income, managed by Chris Murphy, which has fallen from a buy to a hold. Like Artemis Income and Trojan Income, Murphy’s fund is predominantly large cap focused, and has failed to keep up with many of its rivals that have cashed in on the rally in small and mid caps.
This too is currently on the FE Select 100 list. It has five FE Crowns and is highly rated by the AFI panel.
FE Alpha Manager Mark Barnett’s Invesco Perpetual UK Strategic Income fund has been moved from the White List to the Grey List due to the deterioration in its five-year performance figures. It is ahead of its peer group and the All Share over the period, though the absence of 2008 from the study has seen it fall sharply down the list.
Invesco Perpetual Income and High Income remain sells after last year’s downgrade, but manager Neil Woodford’s SJP UK High Income fund has fallen on to the black list. The £1.3bn portfolio is bottom quartile in the IMA UK Equity Income sector over five years, with returns of 79.43 per cent.
Invesco Perpetual UK Strategic Income has been a constant fixture on the FE Select 100, and FE Research decided to maintain its buy rating for Invesco Perpetual Income following the news of Mark Barnett’s imminent appointment.
Jupiter Income, Newton Higher Income and SWIP UK Income all retained their “sell” rating. Jupiter and Newton have recently seen a change in management through the appointments of Ben Whitmore and Richard Wilmot, but Sanlam is not yet satisfied that either has turned the corner after several years of below-par performance.
Looking at the positive end of the study, it was a particularly good year for Stephen Message and Thomas Moore, whose Old Mutual and Standard Life funds were promoted to the White List and given a buy-rating.
Performance of funds, sector and index over 5yrs
Source: FE Analytics
Both Standard Life UK Equity Income Unconstrained and Old Mutual UK Equity Income have a significant mid cap bias, which has aided performance significantly in recent years. Standard Life has a deeper value bias, which explains why it has been so much more volatile than both its sector average and benchmark.
“Thomas Moore took a lead role in January 2009, so his entry into the White List is entirely his own work,” said the study. “Whilst the concentrated number of holdings can make this vehicle more volatile than many of its peers, its wide remit and focus on dividend growth, rather than simply a high starting dividend, has led to not only strong performance but one of the highest levels of income within the study.”
On Old Mutual, the report said: “Since Stephen Message’s appointment in the latter part of 2009, returns have stabilised. The addition of Richard Buxton to the already strong team at Old Mutual should further enhance this and we expect big things.”
Both Message (pictured) and Moore have been highlighted by experts as potential star managers of the future.
Unicorn UK Income, JOHCM UK Equity Income, PFS Chelverton UK Equity Income, Royal London UK Equity Income and Cazenove UK Equity Income – all with a specific small or mid cap bias – were once again given a buy-rating.
“With the beginning of the study period now being 2009, we can clearly see that returns have been dominated by funds that have exploited outperformance by smaller- and medium-sized companies, something we remain cognisant of when rating our buys and sells,” the report said.
“We are pleased that Chris Hutchinson and John McClure on Unicorn UK Income have retained the coveted number-one spot. A focus on dividends from smaller companies has, once again, served them well.”
“David Horner and Taylor, managing the PFS Chelverton UK Equity Income fund, are hot on the heels of Unicorn. A focus on a high starting dividend yield and their similar desire to remain different from the pack, searching out these investments from the smaller end of the market, has generated strong performance.”
“We would highlight, once again, that they have delivered the highest level of income over five years of all funds in the income study.”
“Moving slightly up the market capitalisation spectrum, Royal London’s Martin Cholwill has read both the economy and the stock market extremely well through 2013. A bias towards medium-sized companies in economically sensitive areas of the market has moved his Royal London UK Equity Income fund up one place into third position.”
FE Alpha Manager Leigh Harrison’s Threadneedle UK Equity Income and UK Equity Alpha Income funds also retained their buy-ratings. Harrison is perhaps the most large cap focused of all the managers on the White List, but has still managed to outperform his sector and index over five years, with less volatility.
