Rob Gleeson and his FE Research team believe that more needs to be done to help investors who rely on the income from their investments make informed decisions.Speaking at yesterday’s FE Select 100 UK Equity Income conference, Gleeson (pictured) said: “Yield actually tells you very little when it comes to income. What matters to investors is the cheque they get through the post, not the current yield.”
“We looked at funds which concentrate on income stability and those with a high starting yield, and found that counterintuitively over time they pay out very similar levels of income. Those with a stable income have unsurprisingly been much more consistent, which matters most to investors relying on income.”
The FE Research team has developed a new way of ranking income-focused funds for investors who rely on a regular income stream. As well as yield, they look at the stability of a fund’s dividends and its ability to protect capital on the downside.
Funds are given a score of 100 for each of these measures, then a total score out of 300.
The process is explained in more detail here.
FE Trustnet has identified the income funds that score best over a number of areas over the three years to the beginning of January 2014; next up is multi-asset.
Investors who rely on income, and especially those in retirement, tend to be more cautious than the average investor, making diversified multi-asset sectors a popular hunting ground.
The top-10 is packed with some of the most popular multi-asset income funds, though the number one spot is taken by a relatively unknown product: Sarasin Alpha CIF for Income & Reserves.
Source: FE Analytics
The £78m fund, headed up by FE Alpha Manager John Godley, Phil Collins and Martin Price, scored more than 90 in all three measures, resulting in a 284/300 overall. This put it a full 13 points ahead of any of its rivals.
A yield of almost 4 per cent is very healthy, but it’s also paid out dividends on a very consistent basis, scoring 99/100 in this department.
The fund sits in the IMA Unclassified sector but has the characteristics of one that sits in IMA Mixed Investment 20-60%. The managers currently have 69 per cent in bonds, 21 per cent in equities, with the rest split between cash, property and alternatives.
FE data shows the fund has protected very effectively on the downside, reflected by its score of 91/100 over a three-year period.
Sarasin Alpha CIF for Income & Reserves has been significantly and consistently less volatile than the IMA Mixed Investment 20-60% sector, and has a lower max drawdown.
Performance of fund and sector over 6yrs
Source: FE Analytics
The fund specifically targets dividend stability and downside protection in its objective, stating: “The investment objective is to achieve a consistently attractive level of income coupled with the potential for long-term capital appreciation, whilst aiming to preserve the value of capital over the shorter term.”
Dividends are paid out quarterly.
Sarasin Alpha CIF for Income & Reserves invests predominantly on the behalf of charities, which are naturally cautious in their approach.
Retail investors can’t get access to the fund, though they are able to get exposure to the management team through the FCA offshore-recognised Sarasin IE GlobalSar Income portfolio.
Second on FE Research’s list is the much more popular Fidelity Balanced Income fund – one of the oldest dividend-focused multi-asset portfolios in the IMA universe.
It has been run by FE Alpha Manager Ian Spreadbury since 1995, who was joined by Michael Clark in 2009. The former runs the portfolio’s bond content, which typically makes up between 30 and 35 per cent of assets, while Clark manages the equity content.
The pair hold cash from time to time, but stick to equities and bonds in the main.
Yielding almost 4 per cent, the fund pays out a dividend once a month and has been remarkably consistent at doing so.
Its protection on the downside hasn’t been as impressive as Sarasin’s, thanks largely to its higher equity content, though it tends to pay slightly more out in dividends year-on-year and has delivered more capital growth.
Performance of funds over 6yrs
Source: FE Analytics
Fidelity Moneybuilder Balanced is a favourite with the FE Research team, who note that both Spreadbury and Clark have very sensible investment styles, focusing on quality above all else.
“Compared with other funds that aim to provide a regular earnings stream – whether that is through investing in equities, debt or both – the high level of income that Fidelity Moneybuilder Balanced pays out makes it an above-average performer,” they said.
The fund has ongoing charges of 0.67 per cent and is £428m in size.
Fidelity has another fund in the top three – the Multi Asset Income portfolio. It is yielding less than its more established counterpart at 2.69 per cent, though protects better on the downside. Eugene Philalithis and Nick Peters are lead managers.
Slightly lower down on the list sit the popular Schroder MM Diversity Income, Investec Diversified Income and M&G Episode Income funds.
The Schroders fund has suffered a bout of underperformance recently thanks largely to Marcus Brookes and Robin McDonald’s high cash weighting.
It has been able to pay out a sustainable level of income regardless however, though yield has dipped below 3 per cent.
If you’re ultra cautious the Close Diversified Income Portfolio is likely to be of interest.
It scored 95/100 for downside protection, making more than 5 per cent in 2011 when equity markets lost money across the board. However, its scores are less strong for yield and dividend stability.
The little-known S&W Ilex Income and FP Omnis Distribution funds complete the top-10, but again they are seldom used by retail investors.
Investors may be surprised not to see the popular Jupiter Merlin Income and Artemis High Income funds on the list.
While both have been standout performers in total return terms and the Artemis fund in particular has a high yield, both scored less than 70 for dividend stability.
Artemis’ split between equity and high yield bonds has also seen it score poorly from a capital protection point of view.
In previous article, FE Trustnet highlighted the best UK equity funds and global equity funds for income.
