With cash and bonds such as gilts offering very little income, equity income has garnered more and more attention from investors recently.
While undoubtedly a higher risk investment than traditional fixed income assets, equities can not only offer yield but the potential for capital growth.
De Bunsen, who manages a number of funds of funds at Henderson, says that when investors are looking for an equity fund for their portfolio, they should look at its track record of raising its income, not its starting headline yield.
The £266m Majedie UK Income fund has increased its net distribution on each dividend date since its launch, he notes.
The manager says that because the headline yield is just a snap-shot in time of the percentage of income paid out per unit, it can be a very misleading figure.
“Yield can be looked at in so many ways. If, optically, the yield on a fund has come down then that will normally be because equity prices have gone up,” de Bunsen said.
“It can be the case that you are actually receiving more income from a fund that is yielding 3 per cent than one that is yielding 5 per cent. Investors need to look in absolute terms at the monetary value of the income they are getting over time.”
“Investors want a sustainable dividend and for that to happen the dividend needs to be growing,” he added.
Due to his thoughts on the importance of finding a growing source of income, de Bunsen favours Majedie UK Income, and says that Reid's investment approach helps him to find companies that pay out a sustainable and progressive dividend.
“Our most recent investment has been Majedie UK Income,” he said.
“Chris Reid won’t hold any companies that aren’t paying a dividend. He doesn’t just look for out-of-favour companies or possible turnaround stocks, he wants to see that that change has already started and that they are therefore strong enough to pay a dividend.”“He is still looking for stocks that he believes are undervalued by the market and where growth is underestimated, but he is willing to be patient and collect the dividend. As he puts it, he wants to be paid while he waits.”
Reid (pictured) gained his FE Alpha Manager status in the recent re-balancing due to his fund’s decent track record.
He launched the £266m Majedie UK Income fund in December 2011. It is the eighth best performing fund in the IMA UK Equity Income sector over that time with returns of 72.12 per cent, beating its FTSE All Share benchmark by close to 30 percentage points.
Performance of fund vs sector and index since Dec 2011
Source: FE Analytics
It also boasts top-quartile returns in excess of its benchmark over 12 months.
The fund is currently yielding 3.47 per cent – which is lower than the average fund in the UK Equity Income sector, but its record of income growth makes it stand out, de Bunsen says.
It requires a minimum investment of £10,000. If that amount had been put into Majedie UK Income when it was launched, it would have delivered £1,163 in income since then.
As Reid recently told FE Trustnet, he has a different investment strategy to many of his peers.
“Majedie UK Income is an improvement fund, not a recovery fund, because it is very difficult to generate income from those sorts of companies and income is very important to us,” Reid said.
That approach means, for example, that Reid has a high exposure to the UK’s general financial sector.
He says that stocks such as Man Group, Tullett Prebon, Aviva and 3i Group are all examples of companies that are going through a stage of improvement, but are already in a position to pay a dividend.
Reid says those sorts of companies should also benefit from the UK’s slowly improving economy.
While he isn’t suggesting that UK banks won’t perform well in the current environment, Reid says they are more suited to growth investors.
The manager says that, except for a few notable names such as HSBC, none of the UK’s banks have recovered to a strong enough position to pay a dividend, so he sees no real reason why income investors should take a risk with them.
De Bunsen says the fact that Reid searches for improvement stocks is what makes the fund such an attractive proposition for an income investor, and that this approach also means that he will shy away from the overcrowded areas of the market.
“Although the fund’s manager Chris Reid only has a track record of running this strategy going back to 2011, we have a strong conviction in the process and the team around him,” he said.
“His flexible, focused approach and strong valuation discipline feel right for this market environment, where some parts of the market are looking fairly fully priced,” de Bunsen added.
Majedie UK Income is underweight some of the UK’s largest dividend-paying equities such British American Tobacco, GlaxoSmithKline, Vodafone, HSBC and Royal Dutch Shell.
Reid favours the FTSE 250, which makes up 44.6 per cent of his fund, and only holds 35 per cent in the FTSE 100. The manager also holds 16.3 per cent in overseas stocks.
Majedie UK Income has an ongoing charges figure (OCF) of 1.67 per cent.
De Bunsen, as part of the Henderson multi-asset team, helps manage various portfolios such as the Henderson Multi Manager Active, Managed, Absolute Return, Income & Growth and Distribution funds.
Performance of fund vs sector over 5yrs
Source: FE Analytics
One of the standout names in the range is the five crown-rated Henderson Multi Asset Diversified fund, which is the best-performing portfolio in the IMA Mixed Investment 0%-35% Shares sector over five years with returns of more than 100 per cent.
It has a yield of 2.9 per cent, an OCF of 1.59 per cent and requires a minimum investment of £1,000.
