Almost 98 per cent of UK equity income funds have failed to beat the FTSE All Share index since the Black Monday sell-off, according to research by FE Trustnet.
On 24 August investors around the world were panicked and ditched risk-assets, especially equities, causing the biggest one-day fall in markets since 2011. Many billions of pounds were wiped off global markets in what was swiftly dubbed ‘Black Monday’.
Many markets have only partly recovered from the broad sell-off, which was itself an acute phase of a general de-risking since April that was based around interest rate rises and slowing Chinese growth. This was also hastened on Black Monday when China devalued its currency.
Within the highly popular IA UK Equity Income sector, only two funds are ahead of the FTSE All Share since the sell-off: one passive and one active.
The £900m Vanguard FTSE UK Equity Income Index fund, which uses the FTSE UK Equity Income index as its benchmark (made up from the biggest dividend payers in the UK equity space), is the only passive residing in the sector and is also its best performer since Black Monday.
Performance of fund, sector and index since Black Monday
Source: FE Analytics
The tracker has had a solid run since its launch, having beaten almost two-thirds of funds in the IA UK Equity Income sector since 23 June 2009 by returning 118.98 per cent. This compares with a sector average of 114.06 per cent and the FTSE All Share’s 100.58 per cent rise.
Performance of fund, sector and index since June 2009
Source: FE Analytics
Over this period it has a 5.51 per cent tracking difference against its FTSE UK Equity Income benchmark.
The fund has also been a top income generator. Stripping out the UK equity income funds that use call options to boost their income stream and the Vanguard FTSE UK Equity Income Index fund is ninth best out of 70 funds over five years for income generation, as shown in the chart below.
On an investment of £10,000 five years ago investors would have received £2,810.37 worth of income plus the capital appreciation.
Top 10 income payers (ex booster funds) over 5yrs
Source: FE Analytics
The fund also fared very well in the sell-off of last September/October, which saw the FTSE All Share lose almost 10 per cent over a six-week period. The fund lost 9.2 per cent during this period while the average fund in the sector fell 9.53 per cent, meaning it again beat more than two-thirds of the sector’s members.
However, it should be noted that the Vanguard fund is much more volatile than the majority of its sector peers, scoring the second highest annualised volatility in the sector since the sell-off. Over three years it has the fourth highest.
Parmenion’s Meera Hearnden highlights the tracker as a possible option for those looking for an equity income fund for their pension.
“Passive funds may not be everyone’s cup of tea, but this fund can have a place in a retirement portfolio for investors looking to get equity market-type returns to help boost their capital, without paying too much for it and while earning an attractive income,” she said.
Another fan of the fund is Equilibrium’s Mike Deverell, who uses it across a range of portfolios specifically because it has produced a high level of income, he recently said to FE Trustnet.
“It’s a very low cost way of getting an equity income-style fund. Performance has been pretty good since launch and in fact, although it’s only been going since 2009, I know when Vanguard launched the fund, they got FTSE to create this index for them,” Deverell said.
“So, when we first got this fund a few years ago, we actually got back-tested data for the industry going back to 2000 and it generally is fairly consistent in terms of the fact it behaves like a true equity income fund.”
“If a market dips you tend to expect it to fall a little bit less [than the index], and it’s done a good job of keeping up with the market when it rises, so I think since launch it’s done really well.”
Vanguard FTSE UK Equity Income Index also has the smallest ongoing charges figure (OCF) of 0.22 per cent and yields 4.43 per cent.
The NFU Mutual UK Equity Income fund was the only actively managed fund to beat the index since Black Monday, having returned 7.69 per cent against the FTSE All Share’s 7.66 per cent gain.
The £1bn Majedie UK Income is the next best followed by SJP UK Income, both are managed by FE Alpha Manager Chris Reid. The fifth best is Julian Chillingworth’s Rathbone Blue Chip Income and Growth fund.