A portfolio of the 10 highest-yielding funds in the IA UK Equity Income sector has outperformed the 10 lowest-yielding funds since the start of last year, according to an FE Trustnet study.
While the former composite has lost a total of 3.71 per cent since the start of 2015, the latter lost 4.75 per cent in average returns over the same period.
This 104 basis point difference may not seem like much, but the results may come as a surprise to investors seeing as a higher yield can indicate that a fund’s underlying stocks have lost some value or are witnessing negative investor sentiment.
Performance of composites since 2015
Source: FE Analytics
It’s important to note that the high-yielding composite mostly consists of funds that slot into two camps – those that hold smaller company stocks and those that hold bombed-out large-caps in the oil and mining space. As you can probably guess, there was certainly a divergence in total returns between the two over the period in question.
For instance, the highest-yielding UK equity income fund at the start of last year was Unicorn UK Income, which has a concentrated portfolio of mid and small-caps.
During 2014, the smaller companies space fell out of favour because it had performed so well over previous years and investors became apprehensive as to whether its outperformance could continue.
Performance of indices in 2014
Source: FE Analytics
Volatility also increased in markets around this time and records investors were quick to take profits from risker areas of the market, like their small-cap holdings.
This caused yields in the market area to increase and as such FE Alpha Manager Fraser MacKersie and Simon Moon’s five crown-rated fund was yielding 5.12 per cent by the start of 2015.
The £644m fund defied market expectations though and has achieved a positive total return of 2.98 per cent since then, while its FTSE All Share benchmark has lost 9.2 per cent and its average peer has lost 2.22 per cent.
In fact, the fund was the ninth-highest performer in its sector over this period and it now has a lower yield of 4.08 per cent.
Other funds that boasted high yields at the start of 2015 because of a bias towards smaller companies include QAM Downing Monthly Income at 4.4 per cent and Marlborough Multi Cap Income at 4.3 per cent.
While the five crown-rated Marlborough fund, headed up by FE Alpha Manager Siddarth Chand Lall, significantly outperformed its average peer over this time, QAM Downing Monthly fared less well, losing almost three times the amount that the IA UK Equity Income sector average did.
Performance of funds vs sector since 2015
Source: FE Analytics
Marlborough Multi Cap Income has a clean OCF of 0.79 per cent and now yields 4.87 per cent, and QAM Downing Monthly has a clean OCF of 1.44 per cent and yields 4.6 per cent.
Another factor that boosted funds’ yields at the start of last year was having exposure to either the oil & gas or mining sectors. Investors became panicked when the price of crude oil fell to below $40 per barrel in December 2014 for the first time since 2009 amid a general commodity price collapse.
Funds whose yields were lifted by this in the UK equity income space include Allianz UK Equity Income, UBS UK Equity Income and Elite Charteris Premium Income, which offered yields of 4.26, 4.4 and 4.47 per cent respectively at the start of 2015.
Allianz UK Equity Income, which has been managed by Simon Gergel since 2006, aims to deliver both growth and income to investors and does this through high-yielding large-caps. It currently has Royal Dutch Shell and BP in its top 10 holdings as part of a concentrated 49-stock portfolio.
While investors may have been attracted by a high yield at the start of last year, the fund has underperformed its sector average with a loss of 7.31 per cent and now has an even higher yield of 5.08 per cent.
UBS UK Equity Income shares a similar story and holds BP, Rio Tinto and Royal Dutch Shell in its top 10 holdings. Since the start of 2015 its performance has also suffered as it has lost 14.26 per cent compared to the FTSE All Share’s loss of 14.26 per cent. UBS UK Equity Income, which currently yields 5.1 per cent, has a clean OCF of 1 per cent and Allianz UK Equity Income has a clean OCF of 1.23 per cent.
While Elite Charteris Premium Income had a particularly large exposure to mining stocks at the end of 2014, this has since been reduced. That said, it still holds the likes of Randgold Resources, Rio Tinto and Mexican metals mining company Fresnillo in its top 10 holdings.
Since the start of 2015, the £10.9m fund has provided a total loss of 8.79 per cent, outperforming its FTSE 100 index by 143 basis points but underperforming its sector average by 5.78 percentage points.
Performance of funds vs indices and sector since 2015
Source: FE Analytics
Elite Charteris Premium Income, which is headed up by Ian Williams and Nick Taylor, has a clean OCF of 1.69 per cent and now has a slightly lower yield of 4.34 per cent.
Table of highest-yielding UK equity income funds 01/01/2015
Source: FE Analytics
