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The best performing UK income funds for dividends and dividend growth

03 September 2015

More than one-third of UK equity income funds have managed to increase their pay-outs in each of the last five years. In this article, we look at the portfolios which have achieved that feat and delivered the highest amounts of income over the period.

By Alex Paget,

News Editor, FE Trustnet

Some 36 per cent of UK equity income funds have managed to grow their dividends in each of the last five calendar years, according to the latest FE Trustnet study, with the likes of M&G Charifund, JOHCM UK Equity Income and Trojan Income among those which have paid out the most in income over that time.

The fact that only a third of funds in the IA UK Equity Income sector have managed to increase their pay-outs on a consistent basis over the last half a decade may seem poor to many, given that equivalent investment trusts have delivered dividend growth for more than 40 years.

But unlike closed-ended funds, unit trusts and OEICs don’t have the ability to ‘smooth’ their dividends, making it harder for the manager to consistently increase their distribution as they don’t have the luxury of withholding 15 per cent of their earnings in good years to cover the bad ones.

Despite this headwind, there have been 28 funds in the UK Equity Income sector (including those which have recently shifted across to the IA UK All Companies sector as they failed to meet the yield target, such as the Invesco Perpetual income funds and Schroder Income) which have managed to deliver a growing source of income to their investors over the past five years.

This is a higher figure than has been seen in the past, mainly because most funds had to reduce their pay-outs from 2009 to 2010 due to certain high profile company dividend cuts – the most notable being BP after its oil spill in the Gulf of Mexico – meaning many funds’ dividends started from a lower base on this five-year view.  

Of course, while dividend growth is a very important aspect for income investors, we have focused on the funds which have not only increased their pay-out year-on-year but have also managed to pay-out a higher amount to their unitholders than the sector average.

As the table below shows, the top five performing funds in that respect have been M&G Charifund, JOHCM UK Equity Income, Standard Life Investments UK Equity Income Unconstrained, Fidelity MoneyBuilder Dividend and Trojan Income.

 

Source: FE Analytics *figures based on a £10,000 investment made in January 2010

According to FE Analytics, the average UK equity income fund (excluding those which use covered call options such as Schroder Income Maximiser) paid out £2,679.17 on an initial £10,000 investment between January 2010 and the end of 2014.

All five funds have paid out more in income than the average portfolio over that time and have also outperformed both the IA UK Equity Income sector and the FTSE All Share from total return points of view over the last five years.


 

Capital preservation is another important aspect for income investors and – barring the Standard Life Investments and JOHCM funds, which have a higher weighting to mid-caps – the funds mentioned have also had a lower maximum drawdown than their average peer and the index over the last half a decade.

The future looks bright for these five funds as well, given they all currently yield more than the FTSE All Share (3.5 per cent).

The portfolio that has paid out the most over the period in question is Richard Hughes’ £1.2bn M&G Charifund, which has distributed £3,251.17 on an investment of £10,000 made in January 2010.

On that £10,000, investors would have earned £543.58 in 2010 and that figure gradually rose to a £773.01 in 2014.

The fund, which currently yields 4.72 per cent and has outperformed over one, three, five and 10 years, is designed to provide a high and growing income for charities, while at the same time protecting their capital from the erosive effects of inflation over a rolling 10-year period. 

Unfortunately, however, that means it isn’t available to UK retail investors.

The next best income performer has been five crown-rated JOHCM UK Equity Income fund, which is managed by Clive Beagles and James Lowen. The fund has tended to be more biased towards mid and small-caps than its average peer which will have helped its total return and income outperformance over recent years.

The managers take a contrarian approach to investing as well (as shown by their overweight positions in financials and basic materials), which naturally leads them to higher yielding stocks.

Investors who bought £10,000 of units in the £2.7bn fund, which is now closed to new investors, in January 2010 would have earned £2,883.31 by January 2015, with those pay-outs increasing from £384.89 in the first year to £754.85 in 2014.

JOCHM UK Equity Income has also increased its dividend in every year since 2007.

Performance of fund versus sector and index since launch

  

Source: FE Analytics

According to FE Analytics, JOHCM UK Equity Income has been the second best performing portfolio in the sector since its launch in November 2004 with returns of 168.60 per cent, beating the FTSE All Share by 55 percentage points in the process.


 

It is interesting to note that Thomas Moore’s Standard Life Investments UK Equity Income Unconstrained fund has also made the list, given he takes a much more different approach than many of his peers.

For example, he tends to shy away from the UK’s largest (and most widely held) dividend stocks given he sees little growth potential in mega-cap land. He also, as a result of that, focuses on dividend growth rather than headline yield.

Standard Life UK Equity Income Unconstrained’s dividend history

 

Source: FE Analytics

That has certainly worked for his investors though, as Moore (pictured) has increased his dividend in every years since he took charge in January 2009, has paid out more in income than his peers over that time and has been a top decile performer in the sector having beaten in the sector and index in five out of six calendar years.

Given that track record and Moore’s approach, the team at Square Mile think the five-crown rated fund is an interesting offering.

“We have a high regard for SLI’s UK equity capabilities as well as Mr Moore's proficiency as a fund manager in his career so far,” Square Mile said.

While Moore has been able to increase his dividends by avoiding some of the largest UK income-paying stocks, Michael Clark has done the complete opposite on his Fidelity MoneyBuilder Dividend fund which is overweight mega-caps relative to its peers, according to Style Research.

While this means the £1.1bn fund’s total returns haven’t shot the lights out relative to its peers (it is underperforming against the sector over one, three, five and 10 years but beating the index over those time frames) it has certainly helped Clark’s dividend pay-outs.

Those who invested £10,000 in the fund at the start of 2010 would have earned £2,843.54 in income five years later. Those pay-outs steadily increased from £504.66 in 2010 to £627.07 by 2014.

The final portfolio to feature on the list of consistent dividend growers is also biased towards large-caps; namely FE Alpha Manager Francis Brooke’s £2.3bn Trojan Income fund.

Not only has the fund paid out more in income than the average fund in the sector over the last five years and increased its dividend on a consistent basis over that period, it also has the longest unbroken dividend history in the UK open-ended space.


 

According to FE Analytics, the fund has increased its dividend in every full calendar year since its launch in September 2004.

Trojan Income’s dividend history

 

Source: FE Analytics

Trojan Income has also been a strong performer from a total return point of view, posting top quartile returns of 157.74 per cent since launch, beating the FTSE All Share by more than 40 percentage points in the process.

Thanks to Brooke’s more cautious process, the fund has protected its investors far more effectively than its peers as well.

FE data shows it has had the second best risk-adjusted returns – as measured by its Sharpe ratio – and the lowest maximum drawdown (25.60 per cent) in the sector since its inception. All told, Square Mile says it is one of the best funds in its peer group.

“In essence, this fund has a clear investment philosophy, sound investment process and impressive and dedicated team supporting it,” Square Mile said. “As a strategy providing a reliable and growing income stream, and exposure to UK equities through a more sheltered return profile, there are few peers that can match it.”

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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.