Not only is it their domestic market, but the UK is well known for its strong dividend culture and its income potential. On top of that, the UK equity income space is home to some of the most highly rated fund managers in the business, with the likes of Neil Woodford, Mark Barnett, Adrian Frost and Leigh Harrison all well regarded within the industry.
However, investors are constantly told that they need to diversify their income stream away from the often concentrated UK dividend market.
Therefore, in this article – and as we are heading into the annual ISA season – we ask the experts which funds they recommend to sit alongside some of the highest profile UK equity income names likely to already be in an investor’s portfolio.
Chelverton UK Equity Income
Though lower-cap UK equity income funds are likely to be hit by the same market sell-off as the likes of Woodford, Barnett or Frost, investors who are more focused on the actual dividend won’t have too many stock overlaps if they were to look further down the FTSE All Share.
There are a number of funds within the IA UK Equity Income sector that do just that, but Simon Evan-Cook – fund manager at Premier – says David Horner and David Taylor’s five crown-rated Chelverton UK Equity Income fund is the best bet for investors.
“They are running a decent amount of money and they are genuinely focused on the income, so if that’s what investors want, that’s what they will provide,” Evan-Cook said. “Taylor and Horner are very good all-round investors and I would be happy to recommend them.”
The duo launched the now £350m fund – which has 60 per cent of its assets in companies with a market cap of below £1bn – in November 2006.
While the fund had a poor period relative to the sector in 2007 and 2008 due to its small caps bias, it has still outperformed since its launch thanks to its returns over more recent years. According to FE Analytics, for example, it has been the second best performer in the sector over five years with returns of 139.35 per cent.
Performance of fund versus sector and index over 5yrs
Source: FE Analytics
It has been one of the best funds for income generation over the years, as investors who bought £10,000 of units at launch would have since earned £3,785 in dividends. Taylor and Horner are one of a very small number of management teams in the sector to publish their dividend history.
Chelverton UK Equity Income has a yield of 4.61 per cent and has an ongoing charges figure (OCF) of 1 per cent.
Artemis Global Income
‘Going global’ is a default option for most investors who are looking to diversify away from the UK, but one of the major problems is that many global equity income funds hold a number of popular FTSE stocks – such as HSBC, Royal Dutch Shell and GlaxoSmithKline – meaning investors can unwittingly be hit by numerous stock overlaps.
Therefore, Hawksmoor’s Ben Conway says investors should turn to Jacob de Tusch-Lec’s five crown-rated Artemis Global Income fund.
De Tusch-Lec has told FE Trustnet in the past how the fund was designed to sit alongside large-cap UK equity income funds within an investor’s portfolio, as he holds just 10 per cent in the FTSE All Share and avoids the index’s mega-caps.
Conway also says investors are getting a high quality manager if they buy Artemis Global Income.
“We use it because of the manager,” Conway said. “We really rate him and he backed him initially as, from a slightly cynical point of view, we think new managers are likely to be more motivated to outperform as they need to raise assets.”
“However, it is clear he is a very, very talented manager as he is not afraid to move the portfolio around and he has demonstrated a keen sense of timing.”
The £1.7bn Artemis Global Income fund was launched in July 2010 and over that time it has been the best performing portfolio in the IA Global Equity Income sector with returns of 101.03 per cent, beating its MSCI AC World benchmark by 36 percentage points in the process.
Performance of fund vs sector and index since Jul 2010
Source: FE Analytics
Apart from the falling market of 2011, de Tusch-Lec has outperformed in every calendar since inception and the fund has paid out £2,590 on an £10,000 investment made at launch. Artemis Global Income currently yields 3.5 per cent and is overweight European equities.
The OCF is 0.84 per cent.
BlackRock Continental European Income
The European equity market is an attractive source of dividend income but remains very much underappreciated by investors, according to Brewin Dolphin’s Anna Haugaard, who says income investors should focus more on the region to complement their dividend stream – given that it is the second highest dividend paying market in the world.
“European equity income managers also have the luxury of choosing amongst a much wider range of dividend paying companies, there are over 250 companies in Europe with a dividend yield of 3.5 per cent and above compared to around 80 in the UK,” Haugaard said.
“Many of these companies are high quality, globally focused, and generating sustainable and often growing dividends.”
She added: “The managers of BlackRock Continental European Income, Alice Gaskell and Andreas Zoellinger, are running a very successful strategy taking advantage of exactly these types of opportunities.”
BlackRock Continental European Income has been a top decile performer in the IA Europe ex UK sector since its launch in May 2011 and has comfortably outperformed its benchmark in the process, owing to the fact it beat the index in the rising markets of 2012 and 2013 and the more difficult market of 2014.
Performance of fund versus sector and index since May 2011
Source: FE Analytics
It has also been the third highest dividend payer in the sector since its launch, as it has put £1,690 worth of income into investors’ pockets on an initial investment of £10,000.
The £780m fund is a concentrated portfolio of just 44 stocks and generates its 3.94 per cent yield from a collection of high quality large-cap businesses. BlackRock Continental European Income has an OCF of 0.93 per cent.
Somerset Emerging Markets Dividend Growth
Income is becoming an ever important theme within emerging markets, with a number of dividend focused funds joining the IA Global Emerging Markets sector over recent years as management teams are becoming increasingly shareholder friendly.
Also, while it is a commonly held view that developing world equities offer good long-term growth, as there are a number of short-term headwinds facing those regions, taking an income approach is a way in which investors can be “paid while they wait” for the market to move forward.
One of the FE Research team’s favourite funds is the five crown-rated Somerset Emerging Markets Dividend Growth, which is headed up by FE Alpha Manager Ed Lam.
“This fund is one of a small number in its sector to play the dividend card. This is a process we like and it has proved its value in several different environments,” the team said.
According to FE Analytics, the £907m fund has been the second best performing portfolio in the sector since its launch in March 2010 with returns of 36.33 per cent. As a point of comparison, its MSCI Emerging Markets benchmark has gained just 6.45 per cent over that time.
Performance of fund versus sector and index since Mar 2010
Source: FE Analytics
Lam aims to deliver income growth and that, along with the fact he holds 12 per cent in cash due to the uncertain environment, means the fund’s yield doesn’t look too attractive at 2.3 per cent. However, investors would have still earned £1,373 on an £10,000 made at launch.
Lam’s largest weightings are to South Korea, India and Taiwan. Its OCF is 1.33 per cent.
JPM US Equity Income
The US is not renowned as fruitful hunting ground for income investors, as companies within North America have historically invested excess cash for growth rather than paying money back to shareholders in the form of dividends.
However, a dividend culture is emerging in the states and therefore investors may want to turn to US equity market to supplement their income. Clare Hart and Jonathan Simon’s JPM US Equity Income fund features on the FE Select 100 and the team at FE Research say it is an interesting proposition.
“This fund’s investment process is an interesting one,” the team said.
“Even though its track record is quite short to assess its true effectiveness, the stock-picking method it employs is tried and tested and has worked well elsewhere. The team has also gained experience running another US equity fund in the same way.”
“The fund’s yield is attractive and consistently reaches its target, but investors should know that it remains lower than that offered in Europe and the UK, although it may be more stable.”
Performance of fund versus sector and index over 5yrs
Source: FE Analytics
According to FE Analytics, Hart and Simon’s £2.9bn fund – which yields slightly less than 2 per cent – has been a top quartile performer in the IA North America sector over five years with returns of 112.91 per cent and, more importantly, it has narrowly beaten the S&P 500 in the process.
Investors would have earned more £1,700 in income from the fund if they had invested £10,000 five years ago. Its ongoing charges figure (OCF) is 0.93 per cent.