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Royal London UK Equity Income loses top spot on Sanlam White List

27 July 2015

The PFS Chelverton Equity fund has become the highest rated portfolio in the latest edition of Sanlam’s White List of top funds, while a number of other key moves have taken place in the group’s Income Study.

By Gary Jackson,

Editor, FE Trustnet

Martin Cholwill’s Royal London UK Equity Income fund has been pushed down the rankings in Sanlam Private Wealth’s (SPI’s) closely watched Income study, being replaced on the top spot by PFS Chelverton Equity Income.

The half-yearly report, which has been running for more than three decades, examines UK equity income funds in terms of absolute income generated over the past five calendar years, capital growth for each of the past five 12-month periods and volatility over the same time frame.

Funds are then placed on one of three lists: the White List, which is SPI’s “select group” of funds that have established their ability over five years to produce superior total returns; the Grey List, which is often a temporary home for a manager with an out-of-favour style or an early warning signal for a fund in decline; and the Black List, which is where consistent underperformers are found, acting as a warning sign for investors to seek other opportunities.

While the four FE Crown-rated Royal London UK Equity Income (Cholwill pictured right) was the top fund on the White List in the previous study, that spot is now held by the PFS Chelverton Equity Income fund, which holds five crowns and is currently showing first-decile total returns over three and five years.

Performance of fund vs sector over 5yrs

 

Source: FE Analytics

Charles Brand, head of portfolio management at SPI, said: “The PFS Chelverton UK Equity Income fund has taken the top position in the White List. This fund is co-managed by David Horner and David Taylor and has benefitted from focusing on mid and smaller capitalisation companies, which have outperformed the wider market, while FTSE 100 stocks have been clear laggards in 2015.”

FE Analytics shows that around three-quarters of the fund’s performance over the past five comes from its exposure to small-caps, with the remaining one-quarter stemming from the mid-cap space.

This does mean that it has been slightly more volatile and had a higher maximum drawdown than its average IA UK Equity Income peer but it sits in the top quartile when it comes to risk-adjusted returns as measured by the Sharpe, Sortino and Treynor ratios.

A focus on small and mid-caps is also evident in the second highest placed fund on the White List – Fraser Mackersie and Simon Moon’s Unicorn UK Income.

The managers had to deal with the death of lead manager John McClure in the summer of 2014 and performance took a hit after investors took profits from small and mid-caps at the same time Mackersie and Moon were dealing with outflows.

However, the fund is back in the top decile so far in 2015 and this has pulled the fund back up so it sits in the first quartile over one, three and five years. Over five years, it’s the highest returning fund in the sector with a 137.75 per cent gain.

It has managed these five-year numbers with lower annualised volatility than its average peer and the FTSE All Share, although its maximum drawdown is bottom-quartile at 14.63 per cent.

The former leader of the White List has fallen into third place. Royal London UK Equity Income is another fund that looks in the small and mid-cap parts of the market, although it has some income large-cap stalwarts such as British American Tobacco, GlaxoSmithKline and AstraZeneca in its top 10. 

It’s a member of the Select 100 and 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.”


 

“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.”

Performance of funds vs sector and index over 5yrs

 

Source: FE Analytics

JOHCM UK Equity Income, managed by Clive Beagles and James Lowen, has regained its place on the White List, after falling onto the Grey. Brand said: “The fund suffered towards the end of 2014 with its energy exposures in the face of the declining oil price, but with the stabilisation of the commodity, the headwinds for this strategy have been largely removed.”

The five FE Crown-rated fund is first quartile over three and five years, although it did post a bottom quartile year in 2014 owing to the issues mentioned above. The FE Research team says the fund is a good option for investors with a time horizon of five years or more and who want exposure to mid and large-caps.

RBS Equity Income has moved “very marginally” from near the very top of the Grey List into the bottom of the White List.

Columbia Threadneedle still has three funds on the list: Threadneedle UK Equity Alpha Income, Threadneedle UK Monthly Income and Threadneedle UK Equity Income. Brand said: “This shows the consistency being delivered by the firm across a range of products amongst their UK portfolio managers.”

Other funds that remain on SPI’s White List include Old Mutual UK Equity Income, Premier Monthly Income, Rathbone Income, Schroder UK Alpha Income and Trojan Income.

However, there have been downgrades. Evenlode Income, which entered the White List in the last study, is now on the Grey List following the underperformance of the FTSE 100, which make up the bulk of its portfolio.

Brand added: “A year of mediocre performance relative to peers has seen the Fidelity MoneyBuilder Dividend fund fall from the White List into the middle of the Grey List. The AXA Framlington Monthly Income fund has befallen a similar fate, with recent performance seeing George Luckraft’s fund being carried into the depths of the Grey List.”

Performance of funds vs sector over 5yrs

 

Source: FE Analytics

There was also some movement in SPI’s Black List. Kames UK Equity Income, which is managed by Douglas Scott and Iain Wells, was highlighted for positive reasons, after it moved into the sector’s second quartile on a three-year view.


 

“The Kames UK Equity Income fund has made positive progress and moved up through the Black List although the fund’s performance was not quite sufficient to see it escape into the Grey List,” Brand said. “It is, however, one of the few funds in the study with a historical 12-month yield above 4.5 per cent.”

Two notable funds have also fallen from the Grey to the Black List. Newton UK Income and Jupiter Income are now on the list of underperformers; both are sitting in the fourth quartile over three and five years as well as over 2015 so far.

Scottish Widows UK Equity Income is the fund at the bottom of the underperforming list. This two FE Crown portfolio is showing fourth-quartile numbers over one, three and five years. Close to 80 per cent of assets are in large and mega-caps, including familiar names like GlaxoSmithKline, Imperial Tobacco, Unilever and HSBC, but this part of the market has been outpaced by small and mid-caps.

Brand said: “Despite this the fund has produced a positive return for investors over the last 12 months. This emphasises the overall positive equity market environment experienced over this period and by the UK equity income sector in general.”

Performance of funds vs sector over 5yrs

 

Source: FE Analytics

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