The two multi-billion pound funds have joined FE Alpha Manager Mark Barnett’s (pictured) Invesco Perpetual High Income portfolio in leaving the sector for IMA UK All Companies, which was forced into a move in March. The changes are likely to be made official next week.
The IMA UK Equity Income sector definition states that funds must target a yield 10 per cent higher than the FTSE All Share. Strong rising markets have led to significant yield compression in certain sectors and indices, making it harder for fund managers to adhere to the rigid sector constrained.
The three Invesco income funds, which are currently yielding between 3.13 and 3.42 per cent – compared to the FTSE All Share’s 3.2 per cent – have been repeatedly warned by the IMA for falling behind their target, but former manager Neil Woodford and new manager Barnett have refused to jeopardise their best ideas.
Barnett says he has no problem with his funds leaving their natural home, and suspects they will probably return to IMA UK Equity Income when yields normalise.
“[I’m not concerned] and I believe nor are the clients I’ve spoken to,” he said in an interview last week.
“The portfolios are not managed solely on income, and never have been. It’s about generating total return. Income is obviously an important component of that, but it is capital and income.”
“The key to total return is the ability to identify sustainable dividend growth, which will deliver you both your income and your capital. It’s on that basis that I run portfolios.”
“If I am [out of the UK Equity Income sector] I will live with that, but it could be that I end up back in the sector again as has happened before.”
Henderson UK Equity Income & Growth, managed by FE Alpha Manager James Henderson, was also made to leave the sector in 2013. The fund was formerly known as Henderson UK Equity Income, with the name change a direct result of the sector change.
Like Barnett, Henderson (pictured) prioritises total return and dividend growth – not yield. “My fund has been moved into the All Companies sector because I haven’t really been rotating out of the sectors where there has been strong capital growth. The headline yield [on my fund] has fallen because of the capital appreciation of the shares ,” he said, speaking about the sector change last year.
FE Trustnet discussed whether the UK Equity Income target did more harm than good in a recent article, with many industry experts calling for a looser sector definition.
Again like Barnett, Henderson says he has no intention of changing his style to hit a yield target. Henderson has a preference for mid-caps which have seen yields compress particularly aggressively in recent months.
Henderson UK Equity Income, Invesco Perpetual High Income, Invesco Perpetual Income and Invesco Perpetual UK Strategic Income are all strong performers from a total return point of view over the long-term, posting top-quartile returns in the IMA UK All Companies sector over 10 years.
The performance has also been strong enough to see them achieve top quartile returns in the IMA UK Equity Income sector.
Performance of funds and sectors over 10yrs
Source: FE Analytics
The four funds are all ahead of their sector over three and five year periods as well. Invesco UK Strategic Income and Henderson UK Equity Income & Growth are top-quartile over both time periods.
Among the other UK Equity Income funds with yields less than 10 per cent higher than the FTSE All Share at present – and which therefore could be at risk of being asked to leave the sector – include Invesco Perpetual Income & Growth, Aviva UK Equity Income, R&M UK Equity Income and Leigh Harrison’s Threadneedle UK Equity Income portfolio. All are yielding less than 3.5 per cent, according to data from FE Analytics.
