The major talking point within the industry this week has been announcement from the Investment Association that it will launch a consultation into the yield criteria within the UK equity income sector. 
Currently, funds need to yield more than 110 per cent than the FTSE All Share over rolling three-year periods and they cannot yield less than 90 per cent of the index in any one year – otherwise they are booted elsewhere.
But, the huge distortion in markets has led high quality companies with reliable dividends yielding very little due to high valuations, while the biggest yields on offer tend to come from businesses with challenged future pay-outs. It’s basically a minefield out there.
This challenging backdrop means many ‘income’ managers now find themselves in the IA UK All Companies sector with Carl Stick at Rathbones joining the increasingly long list of refugees this week.
Elsewhere, over the past seven days equities have continued to rise as have bond yields, yet most people we speak to still tend to be pretty bearish. Let’s face it, no one has any idea what the remainder of 2016 has in store for investors – so to quote Samuel L. Jackson from the 1993 blockbuster hit Jurassic Park: “Hold onto your butts!”
As such, we have had lots to keep us busy here at FE Trustnet. So, as always, here we highlight a selection of our favourite articles from the past week.
How have the ex-IA UK Equity Income funds fared since leaving the sector?
Starting off with the major talking point of the week, reporter Lauren Mason used FE Analytics to take a look at how the funds that have been ousted from the IA UK Equity Income sector have fared over the last few years.
The article was written following the news that the sector requirements are currently in review, combined with the fact that Carl Stick’s top-performing Rathbone Income fund was the last fund to bite the dust and fail the yield requirements.
Mason’s research found that, in terms of performance alone, a composite of the 15 ‘refugee’ funds outperformed the current IA UK Equity Income sector average over one, three, five and 10 years.
While the current income sector outperformed in terms of its average dividend yield pay-out over the last five years, data from FE Analytics shows that there are a number of ex-income funds that have actually paid investors a greater amount of income than many of the household names in the IA UK Equity Income sector.
Click through to find out which ‘refugee’ funds have delivered strong dividend yields over the last five years despite being booted out of the sector.
Why you should own investment trusts after the next crash
This article was put together by news editor Alex Paget following research compiled by Investment Trust Intelligence, a quarterly report published by Kepler Partners.
In it, the authors looked at by how wide a margin trusts have outperformed their open-ended rivals immediately after a market crash and over the longer term.
We all know that investment trusts have structural features thatcan give them the upper hand over OEICs and unit trusts in rallying markets such as gearing and discount volatility, but the results show just how well trusts have performed on average after the last two major market crashes – the dotcom bubble bursting and the global financial crisis.
FE data backed this up, showing that apart from in the Asia Pacific ex Japan space since 2003, trusts have outperformed funds in all of the major equity peer groups over the periods in question. Since 2003, trusts have outperformed on average by 74.77 percentage points and since the 2008 crisis that figure stands at 59.05 percentage points.
Total return performance of sectors (in %) after the last two major market crashes
Source: FE Analytics *average outperformance of trusts is shown in percentage points, not per cent
Though these figures show the potential returns if investors had timed the market perfectly, further research by Paget showed that trusts have generally outperformed funds by a wide margin even if investors had bought at completely the wrong time prior to the past two crashes.
Mark Barnett: Brexit vote could be good for Invesco Perpetual High Income
With the UK’s remain/leave referendum on the European Union looming, fund managers are starting to talk about the effect – if any – a potential ‘Brexit’ could have on their portfolio. This week saw Invesco Perpetual’s Mark Barnett offer his insights.
The FE Alpha Manager, who runs four investment trusts and three open-ended funds including the £11.6bn Invesco Perpetual High Income and the £5.9bn Invesco Perpetual Income funds, notes that the run-up to the referendum on 23 June will cause a bout of uncertainty and says a further weakening of sterling could be on the cards.
However, he says this would benefit companies where a large share of their earnings come from overseas, as it will boost their earnings in sterling terms and make them more attractive to other investors.
“I believe that the resultant weakness of sterling should have a positive impact on the profits of the companies in the portfolios I manage which have overseas earnings,” Barnett argued.
“The portfolios’ holdings in the tobacco, oil and pharmaceutical sectors are all likely beneficiaries in my view. For example, British American Tobacco recently noted that sterling weakness was beneficial to the translation of its overseas earnings.”
The UK funds that are least correlated to global equity movements
There has been growing talk of late over whether UK exposure should be taken in funds with a focus on the domestic economy or through those that are more linked to the fortunes of global markets. With this in mind, FE Trustnet looked at the IA UK All Companies and IA UK Equity Income funds that have shown the lowest correlation to the MSCI World over the past five years.
Source: FE Analytics
Richard Troue, head of investment analysis at Hargreaves Lansdown, said: “The UK economy has shown quite a bit of resilience more recently and is in a reasonably good place, so when considering exposure to the UK you do need to think to what extent companies are exposed to global trends, especially when it comes to large-caps.”
“That would often mean looking more towards a multi-cap fund, where the manager can go down the market cap into some of the more domestically focused mid and small-caps, or even seeking out a specific mid or small-cap fund.”
Troue’s view is clearly represented in the table: Elite Webb Capital Smaller Companies Income & Growth, Unicorn UK Growth, MFM Slater Growth and MFM Slater Recovery all hunt further down the market cap spectrum, as do Unicorn UK Income and Chelverton UK Equity Income.
The trust that averages 14% returns a year – and it’s on a 20% discount
Over on Trustnet Direct, Anthony Luzio looked at an area of the market that is much misunderstood by investors, but is capable of adding significant value to portfolios over the long term – private equity.
HgCapital is one trust that has used the flexibility afforded to it by private equity to its advantage – it has an delivered average share price appreciation of 13 per cent a year over the past 20 years and average NAV gains of 14 per cent a year over the same period.
The trust looks for businesses that exhibit similar characteristics – B2B firms that supply some sort of mission-critical service, with low customer concentration and high levels of IP, and that derive their earnings from subscriptions.
By looking only for companies that exhibit all these characteristics, partner Matthew Rourke says it is easier to spot those capable of meeting the aim of consistently delivering growth of 10 per cent each year.