The UK equity income space has become one of the most popular areas with investors, largely due to the fact that low yields on offer from bond funds have made company dividends an increasingly sought after commodity.
On top of that, the peer group is home to some of the best known managers in the industry, who have attracted huge amounts of assets due to their long and successful track records.
This has meant that most investors in UK equity income funds hold the likes of Neil Woodford and his £7.7bn CF Woodford Equity Income fund, one of Mark Barnett’s multi-billion Invesco Perpetual offerings, the £6.7bn Artemis Income fund or the various Threadneedle UK dividend paying portfolios.
That’s no assumption either, as FE data shows those funds combined account for 52.3 per cent of the total assets in the UK equity income space.
Source: FE Analytics
However, Ian Rees – head of research at Premier – is avoiding those very names within his five-crown rated Premier Multi Asset Distribution fund, which is a very different approach to many of his peers. 
A recent FE Trustnet article highlighted that Rees’ fund has been the only multi-asset income fund to pay out more than £2,500 on an initial £10,000 investment made five years ago and to have increased its distribution in each of the last five calendar years.
Rees says that providing a regularly growing dividend is one of the main aims of the fund – and that is why he avoids some of the most popular UK equity income managers.
“We do have quite a different mix of UK equity income funds than many of our peers,” Rees (pictured) said.
“This is a key feature for us, and I can be quite dogmatic about this. I meet swathes of managers in the UK equity income space and a large amount of them have little regard for income and very much run their funds with a total return mindset.”
He added: “A lot of them just sit in the sector because it’s a good way of attracting assets. Well, we don’t want to own those funds. For me, it is all about emphasising income and dividend growth.”
Rees says there are three different types of UK equity income funds, but for his Distribution portfolio – which he co-manages with David Hambidge, Simon Evan-Cook and David Thornton – he is only interested in one of those groups.
“There are those which only try to meet the sector’s compliance, and that’s it,” he said. “Then there are those which actually have an income discipline, either those which are high and sustainable yielders or those with a growing income discipline. Those are the funds we like.”
“We don’t expect the managers to grow their dividends in every year, but our number one priority is to find managers who aim to deliver a growing income over time in the same way we are.”
Rees says by taking this approach, he automatically excludes a large proportion of the peer group as not only does he want funds which prioritise income growth, but are small enough in size so that the managers can efficiently run their portfolios in the way they see best. 
“Now, there are some high profile, high quality and household names that try to do that – I think the team at Artemis are fantastic, for example,” he said. “However, we prefer to own smaller, more nimble funds as it allows the manager greater flexibility to implement their views.”
As a result, one of Rees and his team’s favourite funds for their exposure to the dividend paying market is Franklin UK Equity Income fund, which is managed by Colin Morton.
Morton (pictured) is now the longest serving manager in the IA UK Equity Income sector on one fund, following Neil Woodford’s departure from Invesco Perpetual, having taken charge of the £170m portfolio in January 1995.
According to FE Analytics, Franklin UK Equity Income has returned 536.02 per cent over that time, placing it well above the sector average and some 180 percentage points ahead of its FTSE All Share benchmark.
Performance of fund versus sector and index under Morton
Source: FE Analytics
Rees notes that, due to Morton’s low turnover, income generating approach, the large-cap orientated portfolio has never tended to shoot the lights out. However, he likes the fund because it has time beaten the market time after time.
For example, it is ahead over the index over one, three, five and 10 years having beaten the FTSE All Share in 13 out of the past 20 calendar years.
The years in which the fund has underperformed have tended to be during strongly rising markets, such as 1999, 2003, and 2009 but it has come into its own during more turbulent conditions.
For example, it has had the second lowest maximum drawdown – which measures the most an investor would have lost if they had bought and sold at the worst possible times – in the sector since Morton took charge.
Rees says that this capital preservation mindset is the best way to generate income growth, something Morton has done very well over his tenure.
FE data shows that if an investor bought £10,000 worth of the fund in January 1995 they would have since earned £18,506.57 in dividends. While Invesco Perpetual High Income has paid out more over that time, for example, it is the reliability of Franklin UK Equity Income’s payments which stands out.
As the table below shows, the fund has grown its distribution in 14 out of the last 20 calendar years and having gradually increased its pay-out from £370 in 1995 to £1,234 in 2014. More importantly, though, when it has had to cut, the reduction has never been more than £225 of the previous year’s payment.
Franklin UK Equity Income’s dividend history on a £10,000 initial investment
Source: FE Analytics
While Invesco Perpetual High Income – which was run by Woodford for most of this time frame, but is now headed by Barnett – has also increased its dividend in 14 out of the last 20 years, it once had to cut its payment by close to £700 in one year.
All told, while Rees admits Morton’s fund isn’t the most exciting of propositions, he says it is a very good option for investors who want a more cautious vehicle to act as a core holding within a genuine income portfolio.
“What we like about the fund is the way it has outperformed consistently without ever really shooting the lights out. It has consistently ground out the type of outcome we like,” Rees said.
“Morton has a relatively low turnover approach, but the size of the fund gives him immense flexibility. He does follow a large-cap bias, but that allows us to blend it with other funds with a lower-cap bias as while most of the sector has large-cap exposure, they also have a really high weighting to mid-caps.”
Franklin UK Equity Income currently yields 3.99 per cent, thanks largely to its heavy FTSE 100 weighting. Its top 10 holdings include British American Tobacco, Royal Dutch Shell and GlaxoSmithKline.
Its ongoing charges figure is 0.84 per cent.
