The recent sell-off in global equity market, which was sparked by huge falls in the commodity sector, the possibility of a ‘Grexit’ and a significant correction the Chinese market, has divided opinion among industry experts. 
Many have kept their cash levels elevated as the situation in the China could well worsen, there is the chance of a rate hike in the US while the situation in Greece is merely an example of the authorities “kicking the can down the road” – and therefore they think volatility will remain high over the coming few months.
Others, however as FE Trustnet wrote earlier today, think the falls have opened up a buying opportunity as much of the negative sentiment has been overdone and have therefore put their cash to work to snap up lower valuations.
One of which is Ben Willis, head of research at Whitechurch, who has used the sell-off as a chance to redeploy un-invested assets back into the UK equity market – particularly in large-caps which were disproportionally hit due to their higher levels of liquidity and exposure to international trade.
Performance of indices during the sell-off
Source: FE Analytics
“Given the sell-off in UK large caps towards the end of June and start of July, we have taken the opportunity to use some cash to top-up positions in our UK equity income positions. Not only are these companies more liquid in general, many have operations overseas, particularly in Europe, and are impacted negatively when sterling strengthens,” Willis (pictured) said.
“We have been topping up some existing positions – which looks like it could have turned out well – and funds such as CF Woodford Equity Income, Trojan Income and Schroder Income Maximiser have benefited.”
“We had raised cash from taking profits on some positions and were content to hold in cash until an opportunity presented itself. When the FTSE 100 went down to c. 6500, we saw that as an opportunity to time our way back in to UK income.”
In this article, we take a closer look at the UK income funds Willis and his team have been buying back into within their clients’ portfolios.
We start off with FE Alpha Manager Francis Brooke’s Trojan Income fund, which has been one of the IA UK Equity Income sectors best performers over the long-term due to the manager’s stock-picking and focus on downside protection.
The £2.2bn fund is a concentrated portfolio of large-caps with the likes of Unilever, BP, Centrica and HSBC featuring in Brooke’s top 10. Despite that, Trojan Income held up better than both the sector and the FTSE All Share during the recent sell-off – therefore building on its strong track record.
According to FE Analytics, the fund has been a top decile performer over 10 years with returns of 151.39 per cent, beating the FTSE All Share by more than 50 percentage points in the process.
Performance of fund versus sector and index over 10yrs
Source: FE Analytics
It has also had the second best risk-adjusted returns, the lowest annualised volatility and the lowest maximum drawdown in the sector over that time – thanks largely to its decent outperformance in falling markets such as 2008 and 2011.
One potential issue with the fund going forward is its weightings to “bond proxy” stocks like Unilever and British American Tobacco, which could well go through a period of relative underperformance if the US Federal Reserve does start raising rates and yields on fixed income start to rise – a risk Brooke’s talked to FE Trustnet about in the past.
“If there is a normalisation of interest rates because the world has entered a more sustainable growth phase, then I do sympathise with the point being made. However, if a market fall was as a result of a broader risk-off event, would there be an exodus from quality companies? I don’t think so,” Brooke said.
The fund, which currently yields 3.6 per cent and has an ongoing charges figure (OCF) of 1.02 per cent, has also increased its dividend in each of the last seven years.
Willis has also been buying up units in the now £6.1bn CF Woodford Equity Income fund, which has got off to a barnstorming start since star manager Neil Woodford launched the portfolio in June last year after 26 years’ service at Invesco Perpetual.
FE Data shows it has been the best performing IA UK Equity Income fund over that time with returns of 19.26 per cent, while its FTSE All Share benchmark has gained just 3.89 per cent.
Performance of fund versus sector and index since launch
Source: FE Analytics
Although the fund is heavily weighted to the mega-cap end of the market, the fund has joined small-cap orientated funds such as Unicorn UK Income, PFS Chelverton UK Equity Income and Marlborough Multi Cap Income in the top quartile during the recent correction.
Woodford recently told FE Trustnet why his fund has performed well recently and why it should continue to outperform during future bouts of volatility.
“We built the portfolio expecting very little help from the macro economy – particular from Europe – and that continues to be the theme. We don’t believe in cyclical economic recovery,” Woodford said.
He added: “We believe that extraordinary monetary policy will continue and low interest rates will remain and the political risk that overlays that only contributes to that cautious view.”
CF Woodford UK Equity Income yields 4 per cent and is a diversified portfolio of 97 stocks, with its top 10 geared towards larger companies like AstraZeneca and Imperial Tobacco and the back end of the portfolio positioned in small and start-up businesses.
Its OCF is 0.75 per cent.
Schroder Income Maximiser is the final core dividend paying UK fund Willis has been upping his exposure to.
The five crown-rated portfolio, which yields a hefty 6.93 per cent, differs from most of its peers as manager Thomas See uses covered call-options to boost his income distribution. While this provides a ceiling over potential returns, it has meant it has been the largest dividend payer in the sector since its launch in November 2005.
FE data shows Investors who bought £10,000 worth of units then would have since earned £9,600 in income.
The £1bn fund has also outperformed both its sector and the FTSE All Share from a total return point of view since its launch, but has struggled over the year to date and during the recent sell-off largely as a result of its significant weighting to FTSE 100 stocks.
Performance of fund versus sector and index in 2015
Source: FE Analytics
Nevertheless, it is a highly-rated portfolio within the industry and features on the FE Select 100.
“We would expect a defensive bias from the fund’s strategy, meaning it will be better at protecting investors’ capital when markets fall than making money when they rise again. The portfolio is diversified and contains companies that should do well when the economy recovers,” the FE Research team said.
“This should prevent it from lagging too far behind the FTSE All Share index in a rising market. However, the derivatives used limit the upside by their very nature and this is likely to be emphasised further during short-term rallies.”
Schroder Income Maximiser has an OCF of 0.91 per cent.
