FE Trustnet spent a lot of last year talking about the IA UK Equity Income sector after we started our ongoing campaign to improve income transparency. Most fund groups only publish the yield of their funds, which as we pointed out offers investors very little information on the income they are actually receiving.
We’ll be rebooting this campaign in the very near future but in the meantime we’ve crunched the numbers to find out which funds in the highly competitive IA UK Equity Income sector had the highest payouts on an initial investment of £10,000 made at the start of the year.
As the table below shows, the four highest paying funds were those that use enhanced strategies such as covered calls to boost their income streams.
Source: FE Analytics. All payouts on an initial £10,000 investment
Insight Equity Income Booster, like all of the top four income payers, combines a traditional equity portfolio approach with a call option strategy to boost income. It aims for a 7.2 per cent yield; it paid out £870 on a £10,000 investment last year and is currently yielding an above-target 7.72 per cent.
Covered call options allow funds to generate more income than they would be able to through equities alone and offers potential cushioning when market conditions are tough. However, this also means that there is a potential cap on the upside of the securities against which they are written.
When FE Trustnet has ran similar research in the past, enhanced funds have come out on top for income generation. A study in 2014 looking at the highest payers of the previous seven years ranked Schroder Income Maximiser in first place; Insight Equity Income Booster did not have a long enough track record to be included.
When enhanced equity income funds are stripped out of the rankings, we can see that Frikkee’s £42m Smith & Williamson UK Equity Income fund comes out on top after paying out £564 on an initial £10,000.
Frikkee joined the portfolio in July 2013, having previously been manager of the Newton Higher Income fund. Since she took over Smith & Williamson UK Equity Income it has made a total return of 23.44 per cent, placing it first quintile in the peer group, which has an average gain of 19.99 per cent.
Performance of fund vs sector and index over manager tenure
Source: FE Analytics
While at Newton the manager ran Higher Income fund to the house’s thematic approach and followed a strict yield discipline but has a more flexible mandate at Smith & Williamson. She says Smith & Williamson UK Equity Income had “lost its way” in the years before she took over and promptly overhauled the portfolio, bringing in a more flexible style.
The fund’s largest holding is GlaxoSmithKline, followed by HSBC, Imperial Tobacco, British American Tobacco and BT Group. It has a clean ongoing charges figure (OCF) of 0.82 per cent and a yield of 4.23 per cent.
In sixth place is the five FE Crown-rated Unicorn UK Income fund, which is managed by Fraser Mackersie and Simon Moon following the death of John McClure in the summer of 2014. The £570m fund paid close to £530 on an initial £10,000.
The fund looks very different to the typical UK equity income portfolio as, rather than focusing on blue-chip companies, it invests at the lower end of the market cap spectrum. More than 80 per cent of the portfolio is in small and micro-caps, with just 6 per cent in large businesses.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Unicorn UK Income has a 0.81 per cent clean OCF and currently yields 5.53 per cent. Its largest position is in aviation services company BBA Aviation, followed by Interserve and Berendsen.
Next on the list of top income payers are Alan Custis and Alan Clifford's Lazard Multicap UK Income which paid out £488 on £10,000; Michael Clark's Fidelity Moneybuilder Dividend with £470; Leigh Harrison and Richard Colwell's Threadneedle UK Equity Alpha Income with £464; and Craig Rippe's CF Canlife UK Equity Income with £463.
Over the course 2014, the average fund in the sector paid out £417 on a £10,000 initial investment. Our data shows that a number of funds popular with UK retail investors paid around this, but not more.
Carl Stick’s Rathbone Income, Adrian Frost and Adrian Gosden’s Artemis Income, Martin Cholwill’s Royal London UK Equity Income and Francis Brooke's Trojan Income all paid out between £400 and £417 last year.
All of the funds were among those witnessing strong inflows across 2014. The fund that took the most money, however, was Neil Woodford’s CF Woodford Equity Income but this does not yet have a full year of pay-outs so was excluded from the research.
Well known funds that are towards the bottom end of the pay-out rankings include Adam Avigdori and Mark Wharrier's BlackRock UK Income, which put £302 into its investors’ pocket for each £10,000, and Halifax UK Equity Income, which paid out £365.