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FE income campaign: What your UK fund's income payments really look like

04 June 2015

Using data from Square Mile and FE Analytics, we use a simple graphic to show how some of the most popular UK equity income funds have performed over recent years when it comes to income.

By Gary Jackson,

News Editor, FE Trustnet

Last year FE Trustnet launched its income campaign, which aimed to improve the transparency of income funds by finding a better way of presenting their dividend track record.

As we pointed out at the time
, the most commonly quoted metric when it comes to income pay outs – yield – can be a rather poor indicator of how the fund has actually performed in reality. We believe most investors would prefer to see their income pay out in a pounds and pence figure.

This is because yield is worked out by taking a fund’s dividends over the past 12 months and dividing it by the current unit price. A consequence of this is that yields can rise – and make the fund look more attractive – because the unit value has fallen, not because it paid out more to investors.

Some fund groups – such as AXA Investment Managers, F&C Investments, JP Morgan Asset Management, Neptune, Rathbone Unit Trust Management and Royal London Asset Management – were already ahead of the curve and published actual income paid on their factsheets.

Others promised to add or did add such information to their factsheets. These included Troy Asset Management, which started to publish the dividend history of its top performing Trojan Income fund, and Miton, which now reveals them for the CF Miton UK Multi Cap Income and Miton Income funds.

We’re not the only ones that want investors to have more access to this kind of information. Square Mile Investment Consulting & Research recently started including graphs of income history on its reports on fund with an income outlook.

Richard Romer-Lee (pictured), managing director of Square Mile, said: “The income history graphs show absolute income rather than yields, as we believe this is a more useful measure for most investors.”

“There is no guarantee that funds will continue to provide any level of income and investors should bear in mind that a manager’s ability to generate income will be influenced by market conditions. However, we believe that giving investors this information should enable them to make more informed decisions about which funds are right for them.”

Using Square Mile’s graphs and data from FE Analytics, the following article will run through the income histories of some of the most popular funds in the sector.

The orange bars in the graph show the income paid out in that calendar year while the blue line shows the cumulative income earned on an initial investment of £1,000. (Also, apologies that some of the graphs are formatted differently to others – Square Mile doesn’t cover all the funds we wanted to look at so we had to create our own)

 

Artemis Income

 

Source: Square Mile, on an initial investment of £1,000 on 31 December 2008

At £7.3bn and following the sector switch of the giant Invesco Perpetual funds, Artemis Income is the largest fund in the IA UK Equity Income sector. It is run the FE Alpha Manager duo of Adrian Frost and Adrian Gosden with Nick Shenton as co-manager.

The fund, which is rated ‘AA’ by Square Mile and appears on the FE Research Select 100 list, has a clear focus on income generation. Since Frost joined the portfolio in January 2001 – a longer period than shown in Square Mile’s graph, it has paid out a total of £747.88 on an initial investment of £1,000.


The FE Research team said: “The fund is ideally suited for investors who want to receive a predictable income stream through holding UK equities. Frost and Gosden have a cautious approach and only invest in the largest companies in the FTSE that can provide an above-average level of income.”

“The investment process has proved to be successful over the long term and the team has excellent access to company management due to its extensive experience and good reputation.”

As the graph shows, the fund has managed to maintain a consistently growing income over recent years. The managers aim to create a yield above that of the markets; it currently stands at 3.68 per cent.

Artemis Income has a clean ongoing charges figure (OCF) of 0.79 per cent.

 

Invesco Perpetual Income

 

Source: FE Trustnet, on an initial investment of £1,000 on 31 December 2004

Invesco Perpetual Income was one of the flagship funds of the UK equity income peer group before it was moved to the IA UK All Companies sector for failing to meet the former’s yield target. The fund is currently managed by Mark Barnett but for the bulk of its history was run by Neil Woodford.

An initial investment of £1,000 10 years ago would have produced a total income of almost £540 by the end of 2014. Although the fund is an equity income vehicle, it is run with total return firmly in mind and is up 175.07 per cent over the past decade.

The FE Research team said: “The fund was kicked out of the IMA UK Equity Income sector in July 2014 and into the IMA UK All Companies sector, which usually houses funds focused on growth, not dividends. This is because it failed to return 110 per cent of the income of the FTSE All Share over three years.”

“The approach has not changed but it is the market which has changed and we support the manager’s decision to focus on companies which can grow their dividends rather than buying those with high dividends but doubts about their ability to grow.”

The five FE Crown-rated Invesco Perpetual Income fund has a 0.91 per cent clean OCF and yields 2.85 per cent.

 

Schroder Income Maximiser

 

Source: Square Mile, on an initial investment of £1,000 on 31 December 2005

This five crown-rated fund has one of the highest yields in the sector at 6.97 per cent, which results from manager’s Thomas See’s use of covered call options to boost its income stream. Over 10 years an investment of £1,000 would have led to £908.56 in income payments.


The underlying portfolio is based on the Schroder Income fund, which is run by FE Alpha Managers Nick Kirrage and Kevin Murphy. They have a contrarian approach to investing which can prove more volatile than the typical UK equity income fund.

Kirrage and Murphy select holdings on a ‘complete income’ approach, where they look for companies that are cheap compared with their long-term expected value and are capable of increasing their dividend. See then sells derivatives on the stock which creates extra income but limits the capital growth.

Square Mile said: “The options overlay strategy is a complex one but the fund objective is simple. We believe that the managers have structured an interesting proposition that may be of interest to investors requiring high yields. Investors should recognise that what you gain on the swings, you are likely to lose on the roundabouts; in this situation, income will be higher and capital gains lower.”

“Over the very long term there is unlikely to be too much difference in the total return from a fund such as this and a more traditional equity income fund.”

Schroder Income Maximiser appears on the Select 100 and FE’s analysts also say that investors “should not be put off by the complex nature of derivatives”, pointing out that it has been successful in delivering an income equivalent to 7 per cent or more each year.

The fund has a clean OCF of 0.91 per cent.

 

Trojan Income

 

Source: FE Trustnet, on an initial investment of £1,000 on 31 December 2004

As part of the income campaign, we looked at the funds that have grown their income payouts in each year of the last market cycle and found that FE Alpha Manager Francis Brooke’s Trojan Income was the only one to achieve this feat.

The above graph shows the fund has actually lifted its dividend in each of the past 10 years, even in years when many income funds were forced to cut – such as in 2010 and 2011 when BP slashed its dividend by 75 per cent in the wake of the Gulf of Mexico oil spill.

Trojan Income is frequently highlighted in our studies on the UK equity income sector, thanks to a strong 10-year track record in growing income while offering a high degree of capital preservation. This approach has led to total income payouts of £564.46 on an initial £1,000 investment made 10 years ago.

According to the FE Research team: “Trojan Income invests in UK companies that have the potential to increase the level of income they pay out to investors.”

“Brooke likes predictable businesses that generate substantial levels of cash and avoids those that may face problems in the future, no matter how well they are doing today. These include companies that do not pay a dividend, are reliant on a few contracts, or that have a lot of debt.”

Trojan Income has a 1.02 per cent clean OCF and yields 3.64 per cent.

 

Royal London UK Equity Income

 

Source: Square Mile, on an initial investment of £1,000 on 31 December 1999

Martin Cholwill’s Royal London UK Equity Income fund has been highlighted in a number of FE Trustnet studies for the consistency of its returns. In January, for example, we flagged up the fund as being one of the few UK portfolios that have beaten their sector and benchmark in each of the last five calendar years.


The fund has the aim of growing its dividend over time, which as the above graph shows, it has largely achieved over its history. A £1,000 investment made 10 years ago would have led to just under £530 in income pay outs.

Square Mile says: “This fund benefits from a highly experienced manager who has run money across a number of market cycles, delivering an impressive set of returns along the way.

“We hold Mr Cholwill in high regard and believe that his consistently applied investment process, which focuses on cash flow, is wholly sensible given the fund’s investment remit of aiming to grow its dividend distributions over the longer term.”

The five FE Crown-rated fund, which is now £1.9bn in size after a spurt of inflows, has achieved its stellar performance over recent years through exploring the mid-cap space. This may prove to be an attractive feature for investors seeking a differentiated products from the typical equity income fund, which tends to focus on large and mega-caps.

Royal London UK Equity Income has a clean OCF of 0.66 per cent, with a 3.50 per cent yield.

 

Unicorn UK Income

 

Source: FE Trustnet, on an initial investment of £1,000 on 31 December 2004

This £578.3m fund is another that does something different to the average UK equity income fund, with its 71 per cent weighting to small-caps setting it apart from the bulk of its peers. It has just 5 per cent in large-caps and only 1 per cent in mega-caps.

The income paid out by the fund has not moved as smoothly as the others mentioned in this article, as it looks outside the FTSE 100 stalwarts that dominate the income sector. However, an initial investment of £1,000 would have paid out £659.70 in dividends.

Given its focus on smaller companies, Unicorn UK Income is often used as a complementary holding alongside more typical equity income funds, as it offers a degree of insulation should one of the index’s main dividend payers run into problems. FE Analytics show the fund has a much lower correlation to its peers than they do to each other.

Simon Moon and Fraser Mackersie, who took control of the five crown-rated portfolio last year after the death of star manager John McClure, recently told FE Trustnet that there is currently a “fantastic opportunity” in small-caps.

They pointed out that smaller companies are currently trading at about 80 per cent the 12-month forward price/earnings ratio of their larger rivals, which is their biggest discount since the eurozone debt crisis, while they have higher levels of dividend cover than the FTSE 100 and offer an important source of diversification.

Unicorn UK Income has a 0.81 per cent clean OCF and yields 3.99 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.