Seeking a fund that can consistently outperform the market is the ultimate aim of most investors, yet managers who can make the right calls time and time again are certainly a rare entity. However, a new series of FE Trustnet articles will look at which funds from popular sectors have given their investors the fewest sleepless nights over recent years.
We’ve started with the IA UK Equity Income sector, given its persistent popularity with investors. All the funds with a long enough track record have been examined to discover which were ahead of the FTSE All Share in every month of the past three years over cumulative one and three-year periods.
In all, just five funds remained ahead of the market over one year in each of the 36 months while 11 managed to do this over a three-year view. And Royal London UK Equity Income is the only fund that appears in both lists.
Martin Cholwill’s five FE Crown-rated fund is widely regarded as being one of the best offerings in the peer. Over three years it has returned a top-decile 62.70 per cent, compared with a 34.66 per cent rise in the All Share and a 44.92 per cent gain from its average peer.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
The £1.8bn fund, which appears on the FE Research team’s Select 100 and is rated ‘A’ by Square Mile Investment Consulting & Research, has been aided over recent years by a focus on the mid-cap part of the market, although this bias could prove problematic if sentiment takes another dip.
The FE Research team said: “The fund has consistently produced better-than-average returns since Cholwill took over in 2005. It tends to be one of the best performers in its sector when markets are rising, but does a little worse when they fall, a characteristic that can partly be explained by its high exposure to medium-sized companies.”
A similar willingness to look further down the cap spectrum explains some of the other funds that have consistently stayed ahead of the FTSE All Share over three-year horizons. Unicorn UK Income leads the pack of 11 outperformers with a 72.94 per cent return, while PFS Chelverton UK Equity Income is in second place.
Unicorn UK Income has been one of the highest returning UK equity income funds over recent years, being the third best fund on a three-year view and the highest riser over five years. It has more than 75 per cent of assets in small and micro-cap companies.
However, the fund had a difficult 2014 owing to the death of manager John McClure and a fall into the fourth quartile after the small-cap sell-off.
PFS Chelverton UK Equity Income, which has close to 70 per cent of its portfolio in small and micro-caps, is the second best member of the sector over five years but also saw performance flag during 2014.
The fund has fans in the multi-manager space, with highly regarded managers such as F&C’s Gary Potter and Rob Burdett holding it.
Of course, not all of the UK equity income outperformers have needed to rely on smaller companies to beat the FTSE All Share over recent years.
Source: FE Analytics
As its name suggests, Jamie Forbes-Wilson's AXA Framlington Blue Chip Equity Income fund invests at the upper end of the cap spectrum, with 39 per cent of its portfolio in mega-caps and 31 per cent in large-caps. However, while its three-year returns have been higher than the All Share in each month, the total return over the last three years is only five percentage points higher than the index’s.
Matt Hudson’s Schroder UK Alpha Income fund has consistently outperformed in recent years without an especially high weighting to small caps and is a member of the FE Select 100.
The five crown-rated fund has 30 per cent of its assets in mega-caps with another 24 per cent in large caps; only 11 per cent is in smaller businesses. It follows a business cycle investment approach, which sees its holdings shift in line with the various phases of boom and bust.
The FE Research team said: “The fund’s pragmatic approach allowed it to adapt to market changes and helped limit losses during the 2008 financial crisis. It has kept a core allocation to defensive stocks since then, such as pharmaceutical giant GlaxoSmithKline.”
Aside from Royal London UK Equity Income only four other IA UK Equity Income funds have stayed ahead of the All Share in all of the past 36 months over a one-year view, as the table below shows.
Source: FE Analytics
Both of the Threadneedle funds are headed by FE Alpha Manager Leigh Harrison and Richard Colwell as well as holding five FE Crowns. Threadneedle UK Equity Income also has an ‘AA’ rating from Square Mile.
The fund analyst said: “This is a sensibly run UK equity income fund which has a bias towards larger companies.”
“Although Threadneedle is a large institution, the investment teams act with a fair degree of autonomy and the managers are encouraged to run their funds based on their own convictions. The managers believe that consensual group thinking rarely leads to outperformance and the process has been designed to avoid this.”
Old Mutual UK Equity Income has been managed by Stephen Message since December 2009 and is building up a solid reputation, with first-quartile returns over one, three and five year as well as shorter time frames.
M&G Charifund is designed for charities and cannot be accessed by retail investors.
Over the coming weeks, FE Trustnet will look through other major investment sectors to see which funds have been able to outperform benchmarks on a consistent basis.
