JOHCM UK Equity Income, Unicorn UK Income and Threadneedle UK Equity Income are some of the funds that have consistently made some of the best returns in their sector for long-term investors, according to research by FE Trustnet.
Consistent long-term outperformance is a major goal for most investors so in this study we attempt to highlight funds from the IA UK Equity Income sector with a strong record in beating their average peer over five years, regardless of when you look at them.
To do this, we have examined the funds’ five-year quartile rankings over rolling quarterly periods going back to the start of 2005 to see which have resided in the first quartile the most. By using this method, we’ve attempted to put ourselves in the position of the long-term investor who only reviews their portfolio at the end of each quarter and wants to see a strong five-year return from each fund.
Ideally we’d want to look over a longer time frame than this – our recent study on the IA UK All Companies sector went back to the start of 2000 – but with the equity income sector there’s a lack of funds with a long enough track record. However, there’s still 10 years of data here if we start in 2005.
To quantify the findings, we’ve simply turned the quartile ranking into a numeric score. As there’s 21 five-year periods looked at, a fund that never left the top quartile would score 21 while one that was always in the bottom quartile would score 84.
As the graph below shows, two funds have managed to consistently sit in the top 25 per cent of their peers: James Lowen and Clive Beagles’ JOHCM UK Equity Income fund and Fraser Mackersie and Simon Moon's Unicorn UK Income fund.
Source: FE Analytics
The strategy behind JOHCM UK Equity Income focuses on dividends, as the managers believe this is the truest indicator of a business’ financial health and potential. They will only buy companies that pay out more than the market average and will sell a holding as soon as they expect it to pay out less.
This approach has worked over the run, with the fund’s 125.32 per cent total return over 10 years ranking it in fifth place out of the sector’s 46 members with a long enough track record. An initial investment of £10,000 made a decade ago has since paid out £8,301 in dividends.
While Lowen and Beagles focus on large and mid-caps – top 10 holdings include HSBC, AstraZeneca and Rio Tinto – the other fund topping the table looks at the bottom end of the market-cap spectrum.
Unicorn UK Income has 73 per cent of its portfolio in small-caps through holdings such as paving firm Marshalls, safety barrier company Hill & Smith and aircraft services business BBA Aviation.
It must be noted that Mackersie and Moon have not been in charge of the £637.3m fund for the whole period of the study, having been appointed to the portfolio at the start of 2014. The became lead co-managers of the fund following the death of John McClure in the summer of 2014, although they are keen to point out that they had worked alongside the star manager for around six years and are “fully indoctrinated” into his process.
Looking over a shorter time frame and the fund went through a difficult 2014 after the death of McClure, thanks to net outflows and a sell-off in the small-cap part of the market. This led to losses of 2.32 per cent last year while its average peer made 3.16 per cent. However, Unicorn UK Income is back in the top quartile for 2015 to date.
Over the past decade, its 204.68 per cent total return means it has been the best performing member of the IA UK Equity Income sector. Meanwhile, an initial investment of £10,000 has led to a £7,784 income payout.
Performance of funds vs sector and index over 10yrs
Source: FE Analytics
Columbia Threadneedle has two entries on the list: the £3.2bn Threadneedle UK Equity Income fund is managed by Richard Colwell while Jonathan Barber runs Threadneedle UK Monthly Income. Threadneedle UK Equity Income has been in the top quartile for 20 of the five-year periods and slipped into the second just once; the other fund was in the second quartile 12 times.
The research process used by the firm’s UK equity income funds was developed by FE Alpha Manager Leigh Harrison, who is its head of equities, although the individual managers are very much in charge of the day-to-day running of their funds and what they hold.
Both funds have solid long-term track records and sit in the peer group’s top quartile over three, five and 10 years. Top holdings in both include Imperial Tobacco, AstraZeneca and BT.
Matt Hudson’s £634.7m Schroder UK Alpha Income fund deserves a mention as it has only left the first quartile in three periods and these all occurred at the very start of this study’s time frame. Hudson’s process is based on the business cycle, whereby holdings are rotated depending upon the stage of the economy.
Trojan Income is another fund that stands out from its peer group, having spent just one period in the second quartile and two in the third. Like all the funds run by Troy Asset Management, FE Alpha Manager Francis Brooke’s £2.4bn portfolio has a defensive slant and has a strong track record in protecting investors’ capital. This means it frequently tops the tables for longer-term returns and it is also one of a handful of funds to have lifted its income payout in each of the past 10 years.
When you look at the bottom of the table, only one fund has consistently sat in the IA UK Equity Income sector’s bottom quartile – Scottish Widows UK Equity Income, which is managed by the firm’s global equity and quantitative investment teams.
Source: FE Analytics
The fund is benchmarked against the FTSE 100 so its top holdings are blue-chip names such as Royal Dutch Shell, GlaxoSmithKline and HSBC. However, over 10 years the £620m fund has posted a total return of just 31.85 per cent, less than half that of its benchmark.
