Not only do they offer the benefit of paying dividends, but the compounding power of reinvesting these over time means that investors have a better chance of higher returns in the future.
This means equity income funds prove popular with investors who want to grow the value of their investment over the long term. While some people brand them as a defensive asset class, they are arguably a good way to diversify and strengthen a portfolio.
With this in mind, as well as the end of ISA season fast approaching, FE Trustnet looks at five favourable funds from outside the IA UK Equity Income sector that have won recognition from investment analysts.
Artemis Global Income
The four FE Crown-rated Artemis Global Income fund has performed exceptionally well over the last three years, boasting top decile returns of 73.33 per cent and making it the highest performing member of its sector. This return is 30.56 percentage points more than its peers and 25.86 per cent more than the MSCI AC World index.
Fund vs index and sector over five years
Source: FE Analytics
Square Mile, which holds the portfolio in its Academy of Funds, said: “This strategy differentiates itself versus many of its peers both by steering away from the more traditional income stalwarts and by combining stock selection with a consideration of the macro backdrop.”
“The manager ultimately looks to provide a blend of companies with different characteristics whose fortunes do not rise and fall together, as may be the case with a portfolio made up of purely high yielding blue-chip names.”
Square Mile adds that the manager demonstrates passion for the strategy and benefits from being part of the experienced and successful equity income team at Artemis.
The £5bn fund, which currently yields 3.30 per cent, is effectively designed to sit alongside a UK equity income fund, making it a good option for diversification.
Manager Jacob de Tusch-Lec’s (pictured) aim is to utilise a vast range of investments to achieve both capital growth and an increasing income. Unrestricted by stock size or geographical weightings, the fund’s heaviest weightings are in the eurozone, North America and Asia Pacific. It has 12.8 per cent in the UK.
Artemis Global Income has a clean ongoing charges figure (OCF) of 0.84 per cent.
Standard Life Investments European Equity Income
Despite dropping to bottom quartile over the past six months, the Standard Life Investments European Equity Income fund has a very strong long-term track record.
FE Alpha Manager Will James won the title of Best Equity Income Manager at the FE Alpha Manager Awards earlier this month. Over a long track record, he has outperformed his peer group consistently, as a result of picking stocks which have not been exposed to falling markets.
This resilience is shown through the fund’s top-quartile volatility rating of 16.07 per cent, which appeals to the slightly more cautious investor.
The fund, which yields of 3.86 per cent, has achieved returns of 57.8 per cent, which is 11.6 per cent percentage points higher than its peers.
Fund vs sector over five years
Source: FE Analytics
Not only is the £2.3bn fund managed by a star manager, it has also made the FE Research Select 100 list.
FE’s analysts said: “The manager’s focus on companies that can return a higher-than average dividend yield means the fund should do well in falling markets. However, this also means it will underperform its peers during rallies, when investors will focus on growth and capital appreciation.”
James does not focus on the wider economy when making investment decisions and instead allocates half of his portfolio to companies paying a high dividend, 35 per cent to companies which he believes are under-appreciated and show potential for dividend growth, and 15 per cent to companies he believes will surpass expectations in the future.
Standard Life Investments European Equity Income’s OCF is 0.90 per cent.
PFS Somerset Emerging Markets Dividend Growth
The PFS Somerset Emerging Markets Dividend Growth fund has outperformed the market since launch and its strong track record has seen it become an increasingly popular option with emerging market investors.
The five FE Crown-rated fund has a yield of 2.3 per cent. Its total returns over three years are top decile at 22.02 per cent, which is more than twice that of its peers and its index.
Fund vs benchmark and sector over three years
Source: FE Analytics
FE Alpha Manager Edward Lam, who launched the £915m fund in 2010, has maintained a high alpha score and has a strong track record in rising and falling markets, according to FE Analytics.
Lam avoids “value traps” and instead looks to invest in developing world countries which he believes can maintain or increase their dividends.
In terms of asset weightings, almost half of the portfolio is invested in Asia Pacific, 14.29 per cent is invested in Europe and 12.46 per cent is invested in the money market.
This fund has also made it onto the FE Research Select 100 list. According to FE researchers, the fund is worthy of such high accolade for delivering outstanding performance since inception and at lower risk levels than its peers.
PFS Somerset Emerging Markets Dividend Growth has a 1.33 per cent clean OCF.
BlackRock Natural Resources Growth & Income
BlackRock Natural Resources Growth & Income is different from the other funds in the article as it focuses on commodity-related companies only.
The five FE Crown-rated fund has a yield of 3.45 per cent and is highly-rated by the AFI panel of leading professional advisors.
The BlackRock Natural Resources Growth & Income fund buys stocks in energy, agriculture and mining based on their price, their risk potential and the direction the price may move in. It also takes into account whether the companies are able to generate regular cash flows and whether they are willing to distribute some of this to investors while also investing in company growth.
This thorough selection process has won it a place in the FE Research Select 100 list.
The FE research team said: “We particularly like the portfolio construction part of the process, as it keeps the number of stocks to a minimum and assures every company makes a meaningful contribution to the overall performance.”
“This concentration could be double-edged, though, because any issue with a single share will have an equally large impact. The income part of the fund is boosted by the limited use of call options on stocks it holds.”
BlackRock Natural Resources Growth & Income has a clean OCF of 1.05 per cent.
JPM US Equity Income
The JPM US Equity Income fund is also in the FE Research Select 100 list, due to the fact that the fund scores solidly across all metrics.
The £3bn fund boasts top decile returns of 97.99 per cent and top quartile max drawdown of 11.14 over a five-year period.
Fund vs benchmark and index over five years
Source: FE Analytics
What’s more, co-managers Clare Hart and Jonathan Simon are supported by a large number of research analysts for their process of creating growth through dividends.
Yielding 1.97 per cent, JPM US Equity Income is highly-regarded by the AFI panel of leading financial advisors for its stock-picking skills.
Square Mile, who rated the fund as an ‘A’, said: “This is a fairly simple approach to equity investing and the fund has been designed so that investors should not encounter too many surprises.”
“The managers have a disciplined approach that they apply in a repeatable manner, favouring investment into sensible blue chip stocks. The fund's performance should not be too dissimilar to the S&P 500, though the managers' approach should help to soften some of the sharper moves experienced in the wider market.”
JPM US Equity Income has a 0.93 per cent clean OCF.