Last week, FE Trustnet examined the IMA UK All Companies sector for the funds that have stayed in the top quartile over successive rolling five-year periods back to 2004.
In the next article in the series, we turn our attention to the IMA UK Equity Income and Global Income sectors to find the funds that have been able to do the same.
FE Trustnet has looked over the six rolling five-year periods between 31 October 2004 and 31 October 2014 to determine which equity income funds have managed to hold onto a place in the first quartile in each. Only funds with a 10-year track record were included in the study.
Our research suggests investors have fewer options for consistent outperformance when it comes to the equity income sectors, although it must be remembered that past returns are no guide to future performance.
The fund that has made its investors the most over the full 10 years covered by the study is the £584.8m Unicorn UK Income fund, which is now managed by Fraser Mackersie and Simon Moon.
The vast majority of the five crown-rated fund’s track record was established under FE Alpha Manager John McClure, who passed away in June this year. Mackersie and Moon, who were co-managers on the fund and worked alongside McClure for several years, took control of the portfolio after his death.
Over 10 years Unicorn UK Income has gained 211.34 per cent in total return terms, which as the graph below shows is almost double the return of the average IMA UK Equity Income fund and close to 100 percentage points more than its FTSE All Share benchmark.
Over five and 10 years, it is the top-performing fund in its sector.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
However, performance has tailed off over more recent time frames, with the fund sitting in the sector’s bottom decile over one year as well as over three and six months.
FE Trustnet will take a closer look at the fund in our "Buy, hold or fold" series in the coming weeks.
A number of headwinds have emerged for the fund this year, the most obvious being the death of its star manager. In addition, McClure was forced to defend the size of the fund around this time last year after it attracted a huge amount of inflows.
Also, being focused on stocks lower down the market cap scale meant it was hit hard during this year’s sell-off in UK small and mid caps.
Mackersie and Moon have reassured investors that they are able to run the fund with the same approach as McClure, telling FE Trustnet earlier this year: “I’d say we were lucky to join Unicorn at a time in our careers which was very formative for each of us.”
“We both joined when we were very technically able, I would say, but we didn’t have a set-in-stone investment process. John, as a founder of Unicorn, really had worked very hard to put a process in place that we have been fully indoctrinated into and we fully follow.”
Unicorn UK Income has a clean ongoing charges figure (OCF) of 0.81 per cent and yields 5 per cent. FE Analytics shows it has paid out £651.58 over 10 years on an initial investment of £1,000.
The £3.2bn Threadneedle UK Equity Income fund, run by FE Alpha Manager Leigh Harrison and Richard Colwell, also holds five FE Crowns. It appears on the FE Research team’s Select 100 list of preferred funds and is rated ‘AA’ by Square Mile Investment Consulting & Research.
Harrison was appointed to the portfolio in February 2006. It has returned 103.96 per cent since then, making it the fifth highest returning fund in the sector. It is also first decile over 10 years and sits in the second decile over one, three and five years.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
During Harrison’s tenure, Threadneedle UK Equity Income has been slightly more volatile than the average IMA UK Equity Income member, but less volatile than the FTSE All Share.
It also has a lower maximum drawdown than both the sector and the index, while it is the fourth best fund when it comes to alpha generation.
FE Research said: “Colwell and Harrison take a very contrarian approach, looking for the stocks which are out of favour with other investors for bad reasons. The result is a fund that is very different from its peers, which is a useful feature in a sector with many similar funds.”
Threadneedle UK Equity Income has a clean OCF of 0.86 per cent and yields 4.1 per cent.
Over 10 years, it has paid out £605.63 on an initial investment of £1,000.
The relative youth of the IMA Global Equity Income sector means that few of its members have a track record spanning the 10 years covered by this study. None of those that do have been able to remain in the first quartile over all six rolling five-year periods.
If we look over shorter time frames, again, none have achieved the consistent top quartile returns we are after.
James Harries’ £4.3bn Newton Global Higher Income fund comes close, making it into the first quartile in three of its four rolling periods and second in the remaining one.
The fund is rated ‘AA’ by Square Mile and is on the FE Select 100, where its ability to beat its peers in falling markets is highlighted.
During the 2008 financial crisis, the fund moved away from financial companies and other cycle-sensitive areas to adopt a more cautious approach, which served it well during the down market of 2011.
However, its preference for defensive sectors such as healthcare and telecoms means it can lag behind its peers in rising markets.
Newton Global Higher Income has clean ongoing charges of 0.80 per cent and yields 3.56 per cent.
Veritas Global Equity Income, headed by FE Alpha Managers Andy Headley and Charles Richardson, has made top-quartile gains in four out of five rolling five-year periods but is third quartile over the most recent period.
This fund holds four FE Crowns and is rated ‘AA’ by Square Mile. The investment research consultancy describes the product as “a global equity fund with a difference”, as it hoards cash when valuations are high to redeploy it when they fall to more attractive levels.
Square Mile said: “They have no immediate concern about matching the returns of the wider market or about replicating exposures found in the benchmark. This results in a differentiated product that we feel should be of interest to many clients.”
Veritas Global Equity Income has a 1.15 per cent total expense ratio.
Performance of fund vs sector and index over 7yrs to 31 Oct 2014
Source: FE Analytics
In the next article of the series, FE Trustnet will put the IMA Global and Global Emerging Markets sectors under the microscope to find more consistent outperformers.
