Royal London UK Equity Income has only spent two quarters of the past market cycle in their peer group’s fourth quartile, research by FE Trustnet shows, while funds from Aviva Investors, Royal Bank of Scotland and Threadneedle have only been at the bottom in three quarters.
Finding a fund that can consistently avoid being among a sector’s worst performers is a good building block for any portfolio but the hard work comes in identifying these funds. With this in mind, we have looked at the ever popular IA UK Equity Income sector to see which funds spent the least time in the fourth quartile since the onset of the financial crisis in early 2007.
Looking over the 32 full quarters since then, we found that all the 60 members of the sector with a long enough track record had spent some of the three-month periods in the bottom quartile – as would be expected given the differing market conditions that have been seen over this time.
Performance of sector vs index over 8yrs
Source: FE Analytics
However, a more surprising finding was that the five FE Crown-rated Royal London UK Equity Income, which is managed by Martin Cholwill, has only been bottom quartile in two quarters – the second quarter of 2014 and the first of 2015.
Of course, this study on looks at calendar quarters, not rolling periods, so the fund may have dipped into the bottom 25 per cent on an occasional basis. However, an investor reviewing their portfolio quarterly would have only twice seen a ‘4’ staring back at them in the three-month column since 2007.
Royal London UK Equity Income, which now has assets nearing £1.9bn, is well respected by the fund analyst community as it appears on the FE Select 100 and holds an ‘A’ rating from Square Mile Investment Consulting & Research.
Cholwill has been building up the portfolio’s exposure to mid-caps over recent years but, as its track record shows, the manager has been broadly successful at avoiding the worst of the market falls. This positioning may also hold it in good stead over the coming years.
The FE Research team said: “The fund may benefit from being heavily invested in medium-sized companies, as the larger dividend-payers have been very popular in recent years and their share prices have increased to the point where some commentators say they look overvalued. Medium-sized dividend payers have been relatively overlooked as they are regarded as less defensive.”
“Nevertheless it would be wrong to see the fund as a medium-size focused fund as Martin Cholwill invest with little consideration to the market capitalisation. The value of the fund is likely to move more dramatically than most of its peers, but the manager generates good extra returns relative to the extra risks he takes.”
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
FE Trustnet has highlighted the consistency of the fund on numerous occasions. It has outperformed its average peer in each of the past seven years; meanwhile, research earlier in the year showed it had never had a month behind the FTSE All Share on one and three-year views over the previous 36 months.
Royal London UK Equity Income has a clean ongoing charges figure (OCF) of 0.66 per cent and yields 3.57 per cent.
Aviva Investors UK Equity Income, Royal Bank of Scotland Equity Income and Threadneedle UK Equity Income are the funds that came in a close second place to Cholwill’s, spending just three quarters out of the past 32 in the IA UK Equity Income sector’s bottom quartile.
FE Alpha Manager Leigh Harrison has run the £3.4bn Threadneedle UK Equity Income fund since February 2006 and was joined by Richard Colwell in September 2010. The fund is currently first quartile over five years with an 88.45 per cent return and is in the second quartile over three years.
This is another fund rated highly by the FE Research team, holding five crowns and a place on the Select 100. The managers focus on companies that other investors under-value or overlook, with Colwell running the portfolio on a day-to-day basis and Harrison having more of an oversight role.
According to FE’s analysts: “Colwell and Harrison take a very contrarian approach, looking for the stocks which are out of favour with other investors for bad reasons. The result is a fund that is very different from its peers, which is a useful feature in a sector with many similar funds.”
Threadneedle UK Equity Income has a 0.82 per cent clean OCF and yields 3.80 per cent.
Performance of funds vs sector and index over 5yrs
Source: FE Analytics
Chris Murphy’s £963m Aviva Investors UK Equity Income fund is currently second quartile over one, three and five years, making its investors a 76.54 per cent total return over the last half a decade.
This fund holds four FE Crowns and an ‘A’ rating from Square Mile, whose analysts said: “Murphy is an experienced, pragmatic investor who has retained his passion for his vocation over the years.”
“He has a solid focus on what he is seeking in a company and he has strong valuation disciplines. Just as importantly, he has firm views of what is superfluous noise in the market and strives to avoid being distracted by it.”
The manager concentrates on steady, simple businesses that can offer compounding returns and is wary of overpaying for growth opportunities that other investors see as exciting, preferring to take a more mundane approach.
Aviva Investors UK Equity Income has a 0.81 per cent clean OCF and yields 4.09 per cent.
Royal Bank of Scotland Equity Income sits in the sector’s top quartile over five years and is in the second over three years. It is also managed by Murphy and holds four FE Crowns, but is only available to Royal Bank of Scotland clients.
A look at the bottom of the table shows that AXA Framlington Monthly Income has been bottom quartile in 15 of the quarters examined, while Aberdeen UK Equity Dividend and Henderson UK Strategic Income were there in 14.
All three portfolios have significantly underperformed the average IA UK Equity Income fund over the eight years covered by this study, with Henderson UK Strategic Income – which is a fund of investment trusts, faring the worse over this time.
The Aberdeen fund, on the other hand, is currently in the fourth quartile over one, three and five-year periods as well as over three and six months.
Performance of funds vs sector over 8yrs
Source: FE Analytics
