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Funds for rising and falling markets: UK Equity Income

24 March 2014

In the first of a new series of articles, FE Trustnet looks at funds that have managed to protect effectively against the downside, while delivering competitive returns in the process.

By Joshua Ausden,

Editor, FE Trustnet

The strong performance of equity markets over the past five years has made some investors and advisers wary of a possible setback.

Equities have undergone a series of soft patches since 2009, with markets so far posting a slight loss in 2014. The eurozone sell-off in 2011 was a particularly tough time, though on the whole global markets have performed very well since the lows of March 2009. FE data shows the MSCI AC World has almost doubled over five years, with the S&P 500 and FTSE All Share performing even better.

Performance of indices over 5yrs


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Source: FE Analytics

Funds that have been prepared to take on risk have fared best in general, though there are some that have managed to keep their volatility to a minimum and protect against the downside, as well as outperform their benchmarks.

If you’re worried about buying into the top of the market this ISA season but see equities as the best long-term option, here are two five-crown rated UK Equity Income fund with a proven track record in rising and falling markets.


Invesco Perpetual UK Strategic Income


FE Alpha Manager Mark Barnett has recently taken over the multi-billion pound Invesco Perpetual Income and High Income funds, but it would wrong to write-off the manager’s smaller UK Strategic Income fund.

Strategic has helped Barnett build one of the strongest risk adjusted-return track records in the UK Equity Income space in recent years. FE data shows the fund is a top quartile performer in its sector over a one, three, five and 10 year period, and has beaten the FTSE All Share comfortably in all cases.

As well as performing strongly, the fund has an unbroken record of dividend growth under Barnett, and has consistently operated with less volatility than his peers. The graph below shows that Invesco Perpetual UK Strategic Income has been one of the few funds to excel from both points of view over a five year period.


Risk/return of UK Equity Income funds and index over 5yrs

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Source: FE Analytics

It’s interesting to note that the lesser known fund has a superior record to the £8.4bn Invesco Perpetual Income portfolio in the short-, medium-, and long-term.

Barnett has a stellar record in falling markets, boasting a max drawdown – which measures how much investors would have lost if they bought and sold at the worst possible times – of just 12.13 per cent over five years. This compares to 15.94 per cent from the All Share.

Like all equity managers at Invesco, Barnett has a strong emphasis on quality, focusing on names with strong balance sheets and cash flow, predictable earnings and good pricing power. Such companies tend to perform strongly in down markets, including Imperial Tobacco and GlaxoSmithKline, which are both top-10 holdings at present.

The FE Research team says the £390m fund benefits from a higher degree of flexibility, however.

“It differs from Invesco Perpetual Income and High Income in that the manager is not limited by the fund’s size and can therefore invest in some small and medium sized companies,” they said.

Success stories in recent years include Thomas Cook, which is up more than 100 per cent over the past year. It remains a top-10 holding for Barnett.

Invesco Perpetual UK Strategic Income has beaten the All Share in six of the last seven years, including the fast rising market of 2012 and 2013 and the down years of 2008 and 2011.


Rathbone Income

It’s no coincidence that all of the funds on this list are relatively flexible, benefitting from opportunities in small and mid cap companies that have performed so well in recent years.

The £792m Rathbone Income has a particularly strong focus on mid-caps, currently allocating around 25 per cent to companies in the FTSE Small Cap and FTSE 250 indices. Top-10 positions include Restaurant Group.

The manager’s strong stock picking has seen the fund achieve top quartile returns over a three and five year period. The fund followed up outperformance in the down year of 2011 with strong returns in 2012 and 2013.

Performance of funds, sector and index over 3yrs


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Source: FE Analytics


Manager Carl Stick (pictured) had a tough time of it in 2008, admitting that he had too many cyclical companies in his portfolio. However, the FE Research team points out he has clearly learned from his mistake, and now runs one of the most secure funds in the UK Equity Income sector.

ALT_TAG “The portfolio is concentrated around 40 quality companies with low financial and business risk, and that are reasonably priced. Stick is not too interested in understanding the upside potential for a stock, but rather on assessing how much he could lose from investing it,” the team explained.

“This focus on risk explains why the fund is now one of the most secure in the IMA UK Equity Income sector, making it perfect for risk-averse long-term investors.”

The team adds that the fund has a very good record of growing its dividend distribution, and it rates Stick as one of the very best managers in this regard.

Rathbone Income is currently yielding 3.6 per cent – higher than Invesco Perpetual UK Strategic Income, which is yielding 3.09 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.