Warner (pictured) says the funds make a complimentary trio to capture UK domestic growth up and down the market cap spectrum, but will also protect against potential corrections or deceleration in the small and mid-cap space. “The three funds dovetail together quite nicely,” he said. “Royal London has a mid cap bias, Unicorn has a smaller cap bias and Threadneedle is more focused towards larger caps.”
“I’ve held them for a long time, and will continue to do so.”
“If you look at their performance, you can see they’ve done exceptionally well over five years, and of course you’ve got to think, have they done well only by benefiting from a five-year bull market and how will they fare in a slowing or falling market?”
“However, they all have fantastic fund managers and if you’ve got all three funds you’ve a good combination that is covering all bases.”
“And if you think income producing funds will continue to do well in the future, which I do, these are the best.”
Warner also thinks the UK equity income space will be the beneficiary of increased demand for UK equities following the radical pension annuities shake up announced in the recent Budget.
“UK equities are a likely place for the non-annuities money to go into which will stimulate the demand in the market and help to raise prices,” Warner said.
“My personal view is that will be a good place for that money to go. Regulators might think it should go into fixed interest, however.”
“Also, it fits in on a longer term view. If you think the market is likely to rise in the longer term, which allot of people do, you should therefore expect dividends tend to go upwards and see companies’ earnings go upwards.”
“If you’re somebody who is retiring it makes logical sense to invest in something that is going upwards, rather than fixed interest, which is not.”
All three of Warner’s funds recommendations have been strong performers over five years and are also all top quartile performers in the IMA UK Equity Income sector over one, three and five years.
Their strong performance has been boosted by their focus toward small and mid-caps which have dominated the sector since the financial crisis.
However, the strong run for both the small and mid-cap space and the funds in question has led many to question how much value is left in the markets.
An increasing number of fund managers are upping their exposure to larger caps, particularly for those focusing on the UK Equity Income sector, as many of the large caps are paying dividends.
The five crown rated Unicorn UK Income fund, which is headed up by FE Alpha Manager John McClure, has been one of the funds shifting up the market cap spectrum, Warner says.
“John McClure is not as small cap as he was, but you’ve still got the bias in the right direction,” said Warner.”
According to FE Analytics, it has been the best performing portfolio in the IMA UK Equity Income sector since launch in 2004 with returns of 261.97 per cent and has beaten its benchmark – the FTSE All Share – by more than 135 percentage points.
The £615.3m fund has returned 73.53 per cent over five years, beating its sector and benchmark which rose 39.71 per cent and 28.01 per cent, respectively.
Performance of funds vs sector and index over 3yrs
Source: FE Analytics
The fund has grown rapidly in size leaving some managers and analysts to question whether the fund is too large to be able to remain a devoted small cap portfolio.
McClure recently defended his fund’s size and says that if inflows were to affect the way in which he manages the portfolio, he would close it.
However, he admitted that he couldn’t keep buying companies like Dillistone – which has market cap of £15m – because of liquidity constraints. The fund has ongoing charges of 0.82 per cent.
The £954.7m Royal London UK Equity Income fund is also five-Crown rated and run by Martin Cholwill.
According to FE Analytics, the fund has returned 61.73 per cent over three years, beating its sector and benchmark which rose 39.71 per cent and 28.01 per cent, respectively. It has ongoing charges of 0.69 per cent.
Performance of funds vs sector and index over 3yrs
Source: FE Analytics
The £698.4m Threadneedle UK Equity Alpha Income is co-managed by FE Alpha Manager Leigh Harrison and Richard Colwell.
According to FE Analytics, the fund has returned 55.96 per cent over three years, beating its sector and benchmark which rose 39.71 per cent and 28.01 per cent, respectively. It has ongoing charges of 0.88 per cent.
Performance of funds vs sector and index over 3yrs
Source: FE Analytics
Warner also recommends investors place their money equally in all three funds, despite the certainty that one will outperform the others.
“If you put it more into one than the others, you can guarantee that’ll be the one to blow up,” he said.
