Our analysis of the two groups of funds also shows that those which abide by the sector’s yield requirements tend to pay out more actual income to their investors over time - although the funds that have left the sector have managed to grow their payouts more over the last market cycle.
We built two portfolios comprising the income units of the former sector members and those still in the peer group then looked at how they performed when income was stripped out. The average former member has beat the average IMA UK Equity Income fund over one, three, five and seven years in capital terms.
Over the seven years of the past market cycle, the average UK equity income fund has lost 1.45 per cent when it comes to capital. The typical evictee, meanwhile, has fared significantly better with a rise of 4.35 per cent.
Capital performance of portfolios over 7yrs
Source: FE Analytics
The capital outperformance has also been pronounced over the past year when market conditions became more testing. Since 28 October 2013 a former member has typically lost just 0.62 per cent while those still in the sector have fallen 4.43 per cent. Barnett’s Invesco Perpetual UK Strategic Income has done best over seven years in this context, with its capital growing 31.94 per cent. It’s followed by his Invesco Income and High Income funds, which were managed by Woodford (pictured) for the majority of the period in question.
James Henderson’s Henderson UK Equity Income & Growth fund is the best capital performer over five years with a gain of 71.17 per cent. This compares with an average of just 34.78 per cent for the IMA UK Equity Income sector and 42.93 per cent of the typical former member.
Invesco Perpetual UK Strategic Income and Invesco Perpetual Income are in second and third places with 66.31 per cent and 52.55 per cent capital growth respectively.
Performance of funds and portfolios over 5yrs
Source: FE Analytics
Woodford’s SJP UK High Income fund has also outperformed the IMA UK Equity Income sector average for capital growth over one, three and five years. His CF Woodford Equity Income portfolio still sits in the sector, having only been launched in June this year.
The IMA’s sector requirements state that a UK equity income fund has to achieve a historic yield on the distributable income in excess of 110 per cent of the FTSE All Share yield at the fund's year end.
Funds that fail to meet this requirement move out of the sector, with 13 taking this step over the past two years.
Source: Investment Management Association
The sector requirements have proven controversial, with a number of equity income managers arguing that it is a mistake to expect funds to be run in pursuit of yield alone. For example, just before launching the CF Woodford Equity Income fund, Woodford said managing portfolios with a total return approach is the best strategy for investors over the long run.
“Ultimately, do investors worry about if the fund is in the equity income sector or any other sector? I don’t think they do,” Woodford said in May.
“What investors will worry about, though, is if I were to allow an income target to dictate how I were to invest. If I ever believe that the pursuit of yield does conflict with the goals I’m trying to deliver, then the yield will fall.”
Our research suggests the common claim of the sector’s evictees that they prioritise protecting and growing their investors’ capital as well as income appears to have a basis in truth.
The study also shows the average UK equity income evictee has managed to grow its income payout by more than the typical fund in the sector over the seven years of the last market cycle, but has paid out less overall.
Between 1 January 2007 and 31 December 2013, the average fund still in the IMA UK Equity Income sector paid out £287.71 on a £1,000 initial investment. The 2013 payout was 17.90 per cent higher than the one in 2007, growing from an average of £39.34 to £43.28.
Looking at the dozen funds that have moved out of the sector, the average change in annual income earned on £1,000 between 2007 and 2013 was 22.44 per cent - with the average payout rising from £33.96 to £39.59.
However, our data shows the average fund out of these paid just £213.21 on each £1,000 initial investment over the seven years examined.
Out of the former members, the £129.8m JPM UK Strategic Equity Income fund, which has been managed by Ian Butler since May 2010, has grown its annual income earned by the greatest margin, lifting it from £17.43 on a £1,000 investment to £37.82. The fund has paid out £205.76 over the period.
Nick Purves’ £841m SJP Equity Income fund, meanwhile, is the one that has paid out the most on an initial investment of £1,000 - putting £241.91 in its investors’ pockets. It payout in 2013 was 14.56 per cent higher than the one in 2007.
In the next article of FE Trustnet’s income campaign, we will look at how investors would have fared if they picked an equity income fund looking at yield alone. Previous studies include identifying the funds that have grown their income the most consistently over the market cycle.