Schroder Income is the only fund in the IA UK Equity Income sector to have paid its investors their initial investment back in dividends over the last 15 years, according to the latest FE Trustnet study, as investors who bought £10,000 worth of units would have since earned £11,259.48 in income.
Equity income is by far and away the most popular asset class with investors in the current environment given that funds with this approach can deliver dividend growth and allow their unitholders to be “paid while they wait” for the market to turn – therefore allowing for a degree of capital preservation.
This is even more relevant than it has been in the past given the ageing population, ultra-low interest rates on offer and the recent changes to the pensions system.
Like with any sector or asset class, some funds have been better at generating income than others and in this article, using only the most widely held units, we looked at the highly-popular IA UK Equity Income sector to see which portfolios have best rewarded their investors over the longer term – though it must be noted that the past is no guide to future performance.
The study showed that no fund in the sector has managed to pay its investors their initial investment back in dividends over 10 years and over 15 years it is a similar story. In fact the only vehicle to have achieved this feat is the £1.6bn Schroder Income fund.
Source: FE Analytics
As the table above shows, investors who bought £10,000 worth of units in May 2000 would have since been paid £11,259.48 in dividends. This is £3,555.32 more than the average fund in the sector and even £1,359.74 more than Invesco Perpetual Income, which ranks second on the list.
While Invesco Perpetual Income, High Income and UK Strategic Income recently moved into the IA UK All Companies sector, we included them in the study due to the fact that they have a clear income mandate and have spent the majority of their life in the equity income peer group.
According to FE Analytics, the five crown-rated Schroder Income fund has also outperformed from a total return point of view as well. Our data shows it has been the fourth best performing portfolio in the study with returns of 280.14 per cent over 15 years, beating the FTSE All Share by close to 170 percentage points in the process.
The fund has also outperformed in 10 out of the last 15 calendar years.
This trend is clearly borne out in the data as well, because all but one of the portfolios which were top quartile for income generation over the period were also top quartile for their total returns– highlighting the importance of dividends to investors.
The exception was Newton UK Income (previously Newton Higher Income) which has paid out the fourth highest amount in dividends but is second quartile for its total return, though its gains of 182.12 per cent are still greater than those of the sector and the FTSE All Share over that time.
This pattern is also shown when we built an equally weighted portfolio of the highest dividend payers versus an equally weighted portfolio of the lowest dividend payers, with the latter underperforming the former by 174.04 percentage points.
Performance of composite portfolios and index over 15yrs
Source: FE Analytics
On top of that, the portfolio of highest dividend payers has had a maximum drawdown – which measures the most an investor would have lost if they had bought and sold at the worst possible times – which is 10 percentage less than that of its lowest paying rival over the past 15 years.
Schroder Income has been headed-up by the FE Alpha Manager duo of Kevin Murphy and Nick Kirrage, with their deep-value/contrarian style, since May 2010 and prior to that it was managed by Ian Lance and Nick Purves (who now work at RWC).
Before Purves and Lance, both Humphrey Van Der Klugt and Jupiter’s Ian McVeigh have managed the fund during the period in question.
Clearly, the style of the fund has changed over time but Square Mile, the investment research and consultancy firm, say its current focus on massively out-of-favour companies helps it generate higher levels of income.
“The managers screen the market looking for stocks trading on low valuations when compared to their long-term historical averages. Quite what defines long term in this context depends upon the specific circumstances of the businesses,” Square Mile said.
“Certain industries will never replicate their former glory days, for example newspaper businesses, but this is not to say that their franchises are terminally impaired. The fund will often take positions in companies that have structural problems though the team will steer clear of situations where problems on the balance sheet hint that the viability of the business may be in jeopardy.”
They added: “The type of stocks that the team are seeking tend to be high dividend yielding stocks and stocks where the dividend has room to grow materially.”
The fund, which currently yields 3.31 per cent, has a FTSE 350 bias and counts popular but challenged stocks such as GlaxoSmithKline, Vodafone and BP as top 10 holdings as well as much more contrarian calls like Tesco, Barclays, ICAP and Centrica.
Also, while Kirrage and Murphy have only been in charge of the portfolio for a third of the period in question, it is clear that the FE Alpha Manager duo have continued their predecessors focus on delivering a growing source of income.
Schroder Income’s absolute yearly distribution over 15yrs
Source: Square Mile/FE
It is unlikely that open-ended funds will increase their pay-out in every year as, unlike investment trusts which can retain 15 per cent of their earnings to make sure their dividend is covered in a bad year, managers have to distribute all their income annually.
Nevertheless, as the graph above shows, Schroder Income’s dividend has been on a clear upward trend over the past 15 years – except in 2009 in the aftermath of the global financial crisis and in 2010 following BP’s oil spill and subsequent cut.
Schroder Income has an ongoing charges figure (OCF) of 0.91 per cent.