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Three cheap UK Equity Income funds the experts are recommending

09 March 2015

Investors often have to pay up to get exposure to quality managers, but there are some big exceptions. In the first of a new series, FE Trustnet highlights highly-rated funds that are among the cheapest in their sectors.

By Joshua Ausden,

Head of FE Trustnet Content

Investment purely based on cost is a dangerous game. The erosional impact of charges on returns over the long term can give cheap funds a significant head start versus their more expensive rivals, but in plenty of cases the latter have closed the difference – and some.

Like most things in investment, a balancing act is required. Charges should certainly be considered when selecting funds, but shouldn’t be the all-important factor. It costs money to run a successful portfolio, and cutting corners tends to do much more harm than good.

The majority of advisers and investors reading FE Trustnet seem to concur. According to a recent poll, almost half of investors said costs influence their investment decisions, with a further 28 per cent insisting they have a significant influence. Less than a tenth of the 1,668 readers polled said it is the all-important factor.

It is possible to get the best of both worlds, however, with a handful of funds boasting not only highly-rated management teams with strong track records, but also below average charges. With this in mind, we will highlight cheap and cheerful funds across numerous sectors, starting with IA UK Equity Income.


Core UK Equity Income

One of the luxuries of running a successful fund are the economies of scale involved, which allow groups to cut costs and still make a very sizeable profit. Not all firms actively cut costs, as a recent FE Trustnet study highlighted, but there are plenty of examples of those that do.

Among the most popular areas in UK fund management at the moment is UK Equity Income. The search for income in light of ultra-low bond and cash yields automatically makes the sector attractive, but the wealth of top-performing managers on offer makes it even more of a draw.

Large-cap focused, defensive UK Equity Income funds are core holdings for many portfolios and some have grown very large as a result. One of the most highly rated with industry professionals is Adrian Frost’s £7.2bn Artemis Income fund, which has consistently outperformed its FTSE All Share benchmark with less volatility.

 

Source: FE Analytics

It’s also one of the highest paying UK Equity Income dividend payers, generating income worth £548.46 from an initial £1,000 investment over the past decade. It is currently yielding 3.6 per cent.

Frost (pictured) and co-manager Adrian Gosden’s no-nonsense approach to finding quality dividend payers has proven very popular with investors, enabling them to drop clean ongoing charges to just 0.79 per cent. It can be accessed for just 0.7 per cent on certain platforms.

“The fund is ideally suited for investors who want to receive a predictable income stream through holding UK equities,” said the FE Research team, who include Artemis Income in the FE Select 100.

“The investment process has proved to be successful over the long term and the team has excellent access to company management due to its extensive experience and good reputation.”

Star manager Neil Woodford’s CF Woodford Equity Income fund is even cheaper, charging a flat fee of 0.75 per cent, and 0.6 per cent on certain platforms. There are some tracker funds that are more expensive.

Woodford formerly ran the multi-billion pound Invesco Perpetual Income and High Income funds, which charge more than 0.9 per cent. Much lower running costs have enabled Woodford to significantly reduce the costs of his new venture. Mass inflows since CF Woodford Equity Income’s launch in June last year have pushed assets under management to over £5bn already.


Like Frost, Woodford has a preference for large cap quality dividend payers, but tends to make much bigger sector bets. Healthcare makes up more than a third of his portfolio, for example, whereas Frost and Gosden’s biggest sector position is financials, at 25 per cent.

Performance of managers since Jan 2002  

Source: FE Analytics

Woodford’s contrarian bets have more often than not paid off, enabling him to outperform his rivals considerably over the long term.

“His investment track record is extremely impressive and though his contrarian nature can lead to periods where investors may require a dash of patience, he has proved time and again that this patience is ultimately a well-rewarded virtue,” said investment consultancy and research firm Square Mile, who have given CF Woodford Equity Income a maximum AAA-rating.

The fund is currently yielding 4 per cent.

While by no means expensive, other popular core UK Equity Income funds such as Threadneedle UK Equity Income and Franklin UK Equity Income are a little more expensive, charging 0.84 per cent. Francis Brooke’s £2.2bn Trojan Income fund is an increasingly popular option, though with an OCF of over 1 per cent in is on the pricier end of the scale.
 

Multi-cap UK Equity Income

Defensive large cap income funds have many benefits, but they do have a natural bias towards large caps. This is particularly the case for those that attract mass inflows, which therefore don’t have the flexibility to allocate big sums of money to small and mid-cap stocks.

There is a wealth of dividend opportunities further down the market cap scale, and indeed multi-cap income funds have been among the best performing UK funds of recent years. Very few benefit from the economies of scale associated with an Artemis or a Woodford, but there are a handful of bargains for those willing to look hard enough.

Martin Cholwill’s £1.8bn Royal London UK Equity Income fund is a case in point, with ongoing charges of just 0.67 per cent. The fund has sizeable exposure to mid-caps and small-caps, but has the flexibility to go entirely into large caps if the manager thinks it appropriate. Crucially, however, it is still nimble enough to be a genuine multi-cap fund, though inflows have increased in recent years.

Top-10 positions include FTSE 250 companies Close Brothers, United Utilities Group and Restaurant Group.

Performance of fund, sector and index over 10yrs

 

Source: FE Analytics

To say performance has been strong is an understatement. Royal London UK Equity Income is a top quartile performer over three, five and 10-year periods, but even more impressively it has beaten its UK Equity Income sector average for nine consecutive calendar years, and the FTSE All Share in all but two years.


The fund is in the FE Select 100, and is A-rated by Square Mile.

“This fund benefits from a highly experienced manager who has run money across a number of market cycles, delivering an impressive set of returns along the way,” said Square Mile.

“Undoubtedly, performance success has been a contributory factor to the fund gathering a sizeable body of assets, though it is still relatively smaller than a number of competitor products in the equity income sector, therefore allowing greater flexibility when trading the portfolio. This was evidenced in 2014 when Cholwill reduced exposure to mid-caps in response to a sharp sell-off in that area of the market and increase the fund's allocation to large caps.”

“We hold Mr Cholwill in high regard and believe that his consistently applied investment process, which focuses on cash flow, is wholly sensible given the fund’s investment remit of aiming to grow its dividend distributions over the longer term.”

Royal London UK Equity Income is yielding 3.49 per cent.


In the next article of the series FE Trustnet will look at the cheap top-rated options in the IA UK All Companies and IA UK Smaller Companies sectors.

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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.