Skip to the content

The UK equity income funds that have consistently rewarded long-term investors

07 March 2016

Following on from a study revealing the IA UK All Companies funds that have consistently outpaced the FTSE All Share over the long term, we cast our eye over UK equity income funds and find far fewer contenders holding this honour.

By Gary Jackson,

Editor, FE Trustnet

 
Richard Colwell's Threadneedle UK Equity Income is the only current member of the IA UK Equity Income sector that has consistently beaten the FTSE All Share over rolling 10-year periods, the latest FE Trustnet study shows, although a number of other funds have still built up very strong track records over the long run.

In an article last week, we looked at both the IA UK All Companies and IA UK Equity Income sectors to see how they had performed over rolling 10-year periods in order to gauge which peer group had been the most fruitful hunting ground for long-term investors.

In that study, we started with the 10-years spanning 1 April 1991 to 31 March 2001 and moved forward on a quarterly basis up to 1 January 2005 to 31 December 2015, meaning a total of 60 rolling periods were covered.

On average, the IA UK Equity Income sector came out on top. The average member of the peer group had underperformed the FTSE All Share in just 17 of the 60 decade-long periods examined, while the IA UK Companies sector lagged in 57 of them.

Rolling 10yr performance of sectors vs index

 

Source: FE Analytics

Adrian Lowcock, head of investing at AXA Wealth, said: “By taking a longer term time horizon, the focus on dividends really highlights the importance and benefit of compound interest.”

“Over the longer term the income generated during that time will have been built up significantly in the performance of an IA UK Equity Income fund, leading it outperform more often. As a long-term strategy even the average sector performance frequently beats the index.”

But when we looked at the sector see how many individual IA UK Equity Income funds have never lagged the FTSE All Share over rolling 10-year periods only one name was left (in doing this, we only looked at the 41 periods that span 1 January 1996 to 31 December 2015, due to a lack of early data on some of the sector’s members).

However, it’s important to note that a number of the sector’s long-term outperformers have moved into the IA UK All Companies sector after failing to meet the yield requirements of the IA UK Equity Income sector, so until relatively recently would have added to the numbers here.

When we highlighted seven IA UK All Companies funds that have never let the long-term investor down, two of the included funds – Invesco Perpetual High Income and Schroder Income – had built the bulk of their track records when they were in the IA UK Equity Income sector. 

Of the 28 UK equity income funds with a long enough track record, only Threadneedle UK Equity Income – which has been managed by Colwell since September 2010 and Leigh Harrison, Chris White and Scott Meech before this – has outperformed the FTSE All Share in every one of the 41 rolling 10-year periods.


 

Performance of fund vs index over 15yrs

 

Source: FE Analytics

Across the whole period we examined, the £3.2bn fund’s average outperformance of the index over 10 years has been 23.48 percentage points. This outperformance also seems to have intensified more recently, with its gain over the benchmark averaging 45.42 percentage points over the last eight periods analysed.

Colwell’s approach focuses on companies that are unloved by the market and therefore presenting potential value opportunities, while is also happy to hold stocks currently paying no or little in the way of dividends if he sees a catalyst for change.

Current holdings include AstraZeneca, Imperial Brands, GlaxoSmithKline, BT and WM Morrison Supermarkets. The portfolio is also overweight the industrials, consumer services and healthcare sectors, while taking an underweight position in financials, oil & gas and consumer goods.

The FE Research team said: “Colwell’s approach to equity income investing is unusual, and differentiates this fund from peers. This is a useful feature in a sector with many similar strategies.”

“Their focus on medium to long-term dividend growth in areas overlooked by the market has paid off, generating the required level of income with a capital growth kicker alongside.”

Threadneedle UK Equity Income has a clean ongoing charges figure (OCF) of 0.82 per cent and yields 4.30 per cent.

While the above fund is the only to have outperformed the FTSE All Share in all of the periods covered in the study, Stephen Message’s £201.9m Old Mutual UK Equity Income comes close after only lagging the index in two of them.

Over the duration of the total period, its average 10-year outperformance of the index has been 13.17 per cent.


 

Performance of fund vs index over 15yrs

 

Source: FE Analytics

Message’s process is broadly similar to Colwell’s, in that he looks for businesses that are undergoing some form of change or offer undervalued quality. Holdings fit into two buckets: income stocks providing a premium yield or growth stocks where the yield is lower but has the potential to increase.

It has close to 40 per cent of its assets in the financial sector, which is one of the largest weightings in the peer group, with telecommunications and healthcare being the next biggest sector allocations. Its top holding is Aviva followed by Vodafone, HSBC, BP and Royal Dutch Shell. 

On his financials weighting, Message told FE Trustnet last year: “There’s one sector in the market where dividends are low or they’re not being paid and that’s the banking sector. Banking won’t typically fall onto an income investor’s radar [at the moment].”

“But I think you need to look a few years out because the dividend potential of those companies is significant. They will suddenly appear on the income investor’s radar again but I don’t want to wait because I think the potential for capital growth between then is quite strong.”

Old Mutual UK Equity Income has a 0.90 clean OCF and yields 4.44 per cent.

When it comes to other IA UK Equity Income funds with a strong track record in outperforming the FTSE All Share, Alan Dobbie’s Rathbone Blue Chip Income and Growth was next on the list after beating the index in four of the 41 rolling 10-year periods examined.

Jonathan Barber’s Threadneedle UK Monthly Income and Karen Robertson’s Standard Life Investments UK Equity High Income only lagged the market in five of the periods, while Carl Stick's Rathbone Income was next with just six periods of 10-year underperformance.

ALT_TAG

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.