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Five top-rated equity income funds for your 2014 ISA

FE Trustnet looks at the dividend-paying funds in the FE Select 100 that score highly across all performance measures.

Alex Paget

By Alex Paget, Reporter, FE Trustnet
Saturday March 29, 2014

Using equity income funds has become a hugely popular theme among investors in an era when yields on bonds and cash are low.

Companies are also able to grow their dividend over time, while the market backdrop seems to supportive of equity investment, meaning it is unsurprising that this continues to be a highly popular theme.

With that in mind – and with ISA deadline fast approaching – we highlight five top rated and top performing equity income funds that locate their yields from various parts of the global dividend paying market. We looked at the funds in the FE Select 100 with the highest ratings.

Rathbone Income

Buying into the larger end of the UK market has proved to be one of the most popular and safest forms of equity income investment.

One of FE’s top rated funds for that exposure is Rathbone Income, which is managed by Carl Stick. It counts FTSE 100 stocks like GlaxoSmithKline, HSBC and Shell – along with mid-caps such as Restaurant Group – as top 10 holdings.

ALT_TAG Charles Younes (pictured), analyst at FE Research, says that five crown rated fund is a good choice for the more cautious investor.

“Stick is very focused on risk when assessing a company. He is not too interested in understanding the upside potential for a stock, but rather on assessing how much he could lose from investing in it,” Younes said.

“This focus on risk explains why the fund is now one of the most secure in the IMA UK Equity Income sector, making it perfect for risk-averse long-term investors.”

According to FE Analytics, the £790m Rathbone Income fund has been a top quartile performer in the IMA UK Equity Income sector and has beaten its FTSE All Share benchmark with returns of more than 130 per cent over five years.

Performance of fund vs sector and index over 5yrs


Source: FE Analytics

It has only underperformed the sector in three of the last 10 discrete calendar years, though two of those were in 2007 and 2008 when Stick was overly exposed to some of the worst hit areas in the financial crash.

However, Younes says the manager’s new approach shows he has learnt from his mistakes.

The fund’s clean share class has an ongoing charges figure (OCF) of 0.8 per cent.

Unicorn UK Income

Looking further down the UK dividend paying market has been an extremely profitable strategy over recent years, with funds that have had a high weighting to mid and small-caps dominating the UK equity income sector since the period after the financial crash.

One of the best examples of that has been the five crown rated Unicorn UK Income fund, which is headed up by FE Alpha Manager John McClure.

It has been, for instance, the best performing portfolio sector over five years with returns of 315.44 per cent. The now £615m Unicorn fund also sits comfortably in the top quartile over one and three years.

McClure tends to avoid the largest constituents of the FTSE 100 and instead has portfolio that is more geared to companies in the FTSE 250, Small Cap and AIM indices.

Given its recent strong performance, the fund currently only yields 2.87 per cent, however Amandine Thierree (pictured), who is also an analyst at FE, says this shouldn’t put off investors. ALT_TAG

“The level of income paid out is now in the lower range of the UK Equity Income sector as the capital upside has been quite strong. However, this does not necessarily mean less money distributed to investors; we expect it to remain stable,” she explained.

Nevertheless Thierree points out – among other industry experts – that one of the risks with Unicorn fund is that is has grown a substantial amount over recent years, which if it were to continue, could well impact future returns.

Its OCF is 0.82 per cent.

M&G Global Dividend

If investors were looking to diversify their income stream away from the sometimes concentrated UK dividend market, they could turn to more globally-orientated portfolios.

One such yielding portfolio is FE Alpha Manager Stuart Rhodes’ M&G Global Dividend fund. The now substantial £8.8bn fund actually sits in the IMA Global sector instead of the global equity income sector as Rhodes doesn’t want to be tied down by its constraints, as Thierree explains.

“The dividend yield is not the primary concern for stock selection and this is reflected in the fund’s price appreciation, which is stronger than that of its benchmark and sector.”

“This demonstrates a robust process that identifies the right growing companies. He prefers to buy companies with a low yield, as this suggests they are under less pressure and have room to increase their income payout.”

M&G Global Dividend yields less than 3 per cent at the moment. However, Rhodes has increased its net distribution in each of the last three years.

It has outperformed from total return perspective as well. Our data shows it has been a top quartile performer, and has beaten its MSCI AC World benchmark, since its launch in July 2008 with returns of 94.88 per cent.

Performance of fund vs sector and index since July 2008


Source: FE Analytics

M&G Global Dividend is primarily invested in the US and continental Europe, having only 14 per invested here in the UK. The fund’s OCF is 0.91 per cent.

Standard Life European Equity Income

Instead of going global, investors could also use a non-UK regional fund for a growing source of income.

There is a number of dividend paying funds in the IMA North American and IMA Japan sectors, though yields from those markets do tend to be quite low. Continental Europe, on the other hand, has a much more established dividend culture.

For instance, FE Alpha Manager Will James’ £1.8bn Standard Life European Equity Income fund pays out a yield of 3.93 per cent. James also has a good track record of growing income, and Charles Younes rates the manager’s approach.

“James focuses solely on dividends when analysing companies,” Younes explained. “The manager’s focus on companies that can return a higher-than-average dividend yield means the fund should do well in falling markets.”

“However, this also means it will underperform its peers during rallies, when investors will focus on growth and capital appreciation.”

The fund has performed well since its launch in April 2009. FE Analytics shows that Standard Life European Equity Income has beaten both the IMA Europe ex UK and sector and its benchmark – the FTSE World Europe ex UK index – over that time with returns of 88.53 per cent.

It has an OCF of 0.9 per cent.

Somerset Emerging Markets Dividend Growth

Emerging market equities have been massively out of favour over the last three years and have underperformed against their developed market rivals as a result.

With the short term outlook for the developing world still looking turbulent due to concerns surrounding slowing economic growth, currency weakness and the Fed’s tightening monetary policy, a number of experts have recommended using emerging market income funds because they should be being paid an income while they wait for the market to turn.

Thierree agrees and says the five crown rated Somerset Emerging Markets Dividend Growth fund, which is headed up by FE Alpha Manager Edward Lam, is a good option in the sector.

“This fund is one of a small number in its sector to play the dividend card. This is a process we like and it has proved its value in several different strategies,” Thierree said.

She added: “It is interesting to note that the team, which has spent its entire career working on emerging markets, built this process after being caught out by earnings downgrades in 2007. This proves it has learnt from its mistakes, resulting in a stronger selection method that has worked so far.”

The £525m Somerset fund, which yields around 3 per cent, was launched in March 2010.

Performance of fund vs sector and index since Mar 2010


Source: FE Analytics

It has been a top quartile performer in the IMA Global Emerging Markets sector since launch with returns of 14.47 per cent. While that might seem low, its MSCI Emerging Markets benchmark has lost 4.78 per cent over that time.

Somerset Emerging Markets Dividend Growth has an OCF of 1.33 per cent.


This article is for professional investors only. You will be redirected to the News & Research homepage in seconds. If you are having problems getting to the page, please click here
Data provided by FE. Care has been taken to ensure that the information is correct, but FE 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.

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