The average fund that has been moved from the IA UK Equity Income sector to IA UK All Companies after failing to meet the yield target has outperformed its former sector over three, five and 10 years, according to FE Trustnet research.
The Investment Association is consulting on the requirement for UK equity income funds to yield 10 per cent more than the FTSE All Share over rolling three-year periods in order to stay in the sector, after a number of notable ejections in recent years.
This was highlighted by the news that Carl Stick’s five crown-rated Rathbone Income fund is to leave the IA UK Equity Income sector after it failed to hit the peer group’s yield target.
In an article published on Wednesday, the manager said: “Over the years, the yield on the fund has been a function of this process, rather than a specific aim. This has not hindered us from being one of the leading performers in the sector, in terms of dividend growth and total return.”
“We have every intention to be as helpful and constructive as we can in our contributions to the IA’s consultation process. However, we will not change the fund’s process or focus. The Rathbone Income fund is an income fund, irrespective of the sector to which it is assigned.”
FE Trustnet has questioned the Investment Association’s yield-based requirements in the past, arguing that yield represents the drop in value of a fund’s underlying holdings as well as a simple increase in dividend pay-outs.
While more than 10 per cent of the FTSE yields in excess of 6 per cent at the moment, many of these stocks are in bruised sectors such as oil & gas and mining, which many income investors are reticent to buy into.
With big household names including the likes of Invesco Perpetual High Income, Schroder Income and Henderson UK Equity Income & Growth now in the IA UK All Companies sector, FE Trustnet decided to take a look at how these funds have fared compared to their formers peers in terms of dividend pay-outs and their total returns.
When looking at straight performance, the composite of the 15 ‘refugee’ funds has comfortably outperformed the sector, providing a total return of 52.23 per cent over the last five years compared to IA UK All Companies’ average return of 48.75 per cent. To the end of 2015, it has also outperformed the sector during six years over the last decade.
Performance of sector and composite over 5yrs
Source: FE Analytics
However, it could be argued that a number of the funds that were moved such as Elite Webb Capital Smaller Companies Income & Growth, Invesco Perpetual Income & Growth and the aforementioned Henderson UK Equity Income & Growth have dual mandates whereas many funds in the Equity Income sector place a greater focus on income generation.
What’s more, a number of income funds use put options in their portfolios, which cap the total return made from holdings.
As to be expected, the average dividend yield of the IA UK Equity Income sector is higher than the ex-Equity Income composite’s dividend – the former stands at 4.2 per cent while the latter stands at 3.5 per cent.
Delving under the bonnet of the composite though, there are a handful of funds that have actually paid out greater incomes over five years compared to some of the larger household names in the IA UK Equity Income sector.
For example, Henderson Global Care UK Income would have earned investors who bought a £10,000 holding five years ago an income pay-out of £2,387.70 by the end of 2015.
This is a greater pay-out than several of the UK Equity Income heavyweights including Kames UK Equity Income, BlackRock UK Income and Evenlode Income.
20 lowest income-paying UK Equity Income funds over 5yrs with £10,000 investment
Source: FE Analytics
The five crown-rated fund, which is headed up by Andrew Jones, aims to provide both income and capital growth prospects through companies that are contributing to social wellbeing and are conscious of their environmental footprint – its list of top 10 holdings includes stocks such as Informa, Vodafone and BT.
Over five years, the fund has provided a total return of 73.82 per cent compared to the IA UK All Companies sector average’s return of 40 per cent and the IA UK Equity Income sector’s average return of 48.75 per cent.
Henderson Global Care UK Income has a clean ongoing charges figure (OCF) of 0.84 per cent and yields 4 per cent.
The refugee fund that is next in line for its income generation over five years is Invesco Perpetual UK Strategic Income, which has been run by FE Alpha Manager Mark Barnett since 2006.
Anyone who invested £10,000 in this fund at the start of 2011 would have earned a total of £2,317 by the end of 2015.
Like Henderson Global Care UK Income, the five crown-rated fund has also outperformed by its current and former sector average, almost doubling their total returns.
Performance of fund vs sectors under Barnett
Source: FE Analytics
Invesco Perpetual UK Strategic Income has a clean OCF of 0.92 per cent and yields 3.35 per cent.
The third highest income-paying fund to be ousted from the IA UK Equity Income sector is another offering from Invesco Perpetual – the firm’s Income & Growth portfolio has been headed up by Ciaran Mallon since 2005.
Not only has it provided a competitive level of income, it has provided a total return of 108.39 per cent over the manager’s tenure, outperforming its current IA UK All Companies sector average and its former IA UK Equity Income sector average by 8.98 and 10.16 percentage points respectively.
Performance of fund vs sectors under Mallon
Source: FE Analytics
Invesco Perpetual Income & Growth, which is £258m in size, aims for above-average income as well as long-term growth and does so through a concentrated portfolio of 45 stocks that are selected across the cap spectrum.
The fund has a clean OCF of 0.92 per cent and yields 3.84 per cent.
Other refugee funds that deserve an honourable mention for the income they pay their investors include SJP UK High Income, Schroder Income and Threadneedle UK Equity Income (ex =LV) after paying out more than some of the largest funds in the equity income sector.
Table of income paid by refugee funds over 5yrs with £10,000 investment
Source: FE Analytics
