Most expect a difficult year ahead for IA UK Equity Income funds given a number of large-caps have already slashed their pay-outs recently and more are expected to follow, but a recent FE Trustnet article showed that only 15 per cent of the sector were forced to reduce their distributions in 2015.
Whether this will continue, of course, is a different matter given the high pay-out ratios, but low levels of cover, currently on offer in the UK dividend market.
In fact, data from the Investment Association released earlier this week shows that the IA UK Equity Income sector saw three times less net inflows in January 2016 compared to December 2015, which suggests that investor sentiment towards the market area has been bruised.
In terms of investment vehicles, closed-ended funds offer an advantage when it comes to being able deliver consistent dividend growth to investors due to their ability to hold back 15 per cent of the underlying income they generate each year, so they can continue paying out income during tougher times.
Open-ended funds, however, have no such luxury and have no other option than to pay out all of the income they generate.
It isn’t all doom and gloom though, as FE Trustnet’s research using FE Analytics shows that 13 UK funds in the Investment Association universe that have a track record of more than five years have continually grown their dividend since launch on an annualised basis – these funds include the likes of Rathbone Income, Fidelity Moneybuilder Dividend and Troy Trojan Income.
Source: FE Analytics
It isn’t just the older household favourites that have managed to grow their annualised income stream either, as a number of funds that were only launched four years ago also have a three-year track record of increasing dividend pay-outs.
All three have also paid out more than the average fund in the sector in total distributions over the past three years.
First up is Majedie UK Income, which has been headed up by FE Alpha Manager Chris Reid since the end of 2011.
In terms of its price-per-unit pay-out, the £1.1bn fund initially offered investors 4.93 pence per share in 2012. This increased to 6.05 pence in 2013, then to 7.54 pence in 2014 and finished 2015 with a pay-out of 8.53 pence per unit.
The five crown-rated fund aims to outperform the FTSE All Share index over the long term as well as offer an attractive dividend, and since its launch, the fund has beaten its benchmark by 47.19 percentage points with a total return of 89.12 per cent.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
Reid maintains a concentrated portfolio which currently consists of 60 holdings – 40.7 per cent of these are in FTSE 100 stocks, 33.2 per cent are part of the FTSE 250 index, 7.4 per cent are in UK small-caps and 2.4 per cent are in AIM stocks. 13.1 per cent is then invested in international stocks (Reid is allowed to have up to a 20 per cent weighting in stocks outside of the UK) and the remaining 3.1 per cent is held in cash.
Majedie UK Income has a clean ongoing charges figure (OCF) of 0.77 per cent and yields 4.47 per cent.
The second fund with a four-year track record to grow its dividend each year since launch is Marlborough Multi Cap Income, which is managed by FE Alpha Manager Siddarth Chand Lall since its launch in June 2011.
The £1.4bn fund was scrutinised by FE Trustnet earlier this week when it was compared to Gervais William’s Miton UK Multi Cap Income, which adopts a very similar investment process and also has a five crown rating.
Charles Younes, research manager at FE, explained on Monday that given the choice between the two investment vehicles he would opt for Miton, but pointed out that both funds have very strong fundamentals.
“Ultimately they’re both really good funds. They have great managers, they have the same strategy which allows you to diversify your income revenue, it’s just that one has more flexibility and greater capacity,” he said.
Marlborough Multi Cap Income aims to provide both an attractive and growing level of dividend income as well as provide long-term capital growth. Out of 83 funds in the IA UK Equity Income sector, it has delivered the second-strongest total return over three years of 45.03 per cent compared to its average peer’s return of 23.63 per cent.
Performance of fund vs sector over three years
Source: FE Analytics
The fund’s initial distribution in pence per unit was 4.76 pence in 2012. This rose to 5.92 pence in 2013, then to 7.12 pence in 2014 and finished last year at 8.16 pence per unit.
It has a clean ongoing charges figure of 0.79 per cent and yields 4.69 per cent.
The final fund that has grown its dividend consistently over three years since its first pay-out in 2012 is MFM Slater Income, which is managed by FE Alpha Manager Mark Slater, Barrie Newton, Ralph Baber and Nigel Milton.
It is £104.6m in size and currently has 65 holdings which, are chosen using a bottom-up stock selection process.
“The income fund is clearly targeting yield but also, we’re not shooting for the highest-possible return in this fund, it’s a more diversified fund and the biggest positions are much lower weightings [compared to the growth fund],” Slater explained at a quarterly update last week.
“The other thing that’s worth highlighting is, unlike a lot of other income funds, the yield generated by the companies we invest in is the yield that we pay out. In other words we’re not trying to create yield out of ether and we’re not doing any dividend-stripping or anything of that nature.”
Since its launch, the five crown-rated fund has provided a total return of 82.17 per cent compared to its sector average’s return of 58.75 per cent and its FTSE All Share benchmark’s return of 44.24 per cent.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
MFM Slater Income has a clean OCF of 0.8 per cent and yields 4.12 per cent.
