Threadneedle UK Equity Income, Royal London UK Equity Income and MI Chelverton UK Equity Income are examples of funds that have managed to generate some of their peer’s group highest income returns while successfully growing capital, new FE Trustnet research shows.
The ability of funds to pay out an acceptable level of income to their investors is firmly in focus at the moment, after a spate of high-profile ejections from the IA UK Equity Income sector and a consultation by the Investment Association into how to reform the peer group’s membership requirements.
Current rules state that a fund has to have a yield 10 per cent higher than the FTSE All Share’s over rolling three-year periods in order to remain a member of the IA UK Equity Income sector and to not let their yield on a yearly basis fall below 90 per cent of the index.
Failure to hit this target has led to around 20 funds departing the sector in recent years, including high-profile names such as Invesco Perpetual Income, Schroder Income, Rathbone Income and Evenlode Income.
The potential problems that the yield target creates and possible solutions to these (such as lowering it so funds have to match the index’s yield or scrapping it and demanding more transparent information) have been discussed at length. In this research, however, we want to identify which UK equity income funds have served their investors the best over recent year for both growth and income.
We took every current member of the peer group and the ‘exiles’ that have departed and looked at their total returns over the past five years. Then, FE Trustnet broke down the total return to see how much of it has come from capital growth and how much came from income payments.
Source: FE Analytics
The table above shows funds’ total return, followed by how many percentage points of this is down to capital appreciation then the contribution from its dividends. The nine funds on the table are the only ones out of the 96 funds in the bespoke sector that are first quartile for both capital and income returns.
At the top of the list as it has the highest total return of its sector is the £445.8m MI Chelverton UK Equity Income fund. The fund focuses on the small-cap end of the market, in contrast to the mega-cap defensives often associated with a ‘typical’ equity income portfolio.
The managers seek companies have the potential to provide a high initial dividend, progressive dividend payments and long-term capital appreciation. Avoiding the FTSE 100 means low exposure to low yielding sectors like tobacco, big pharmaceuticals, and utilities means that the portfolio has more exposure to higher yielding names.
The following graph – which shows the fund’s total returns and capital growth over the past five years – makes clear how equally balanced its capital and income returns have been over the period in question.
Total return and price performance of fund over 5yrs to end of May 2016
Source: FE Analytics
The other funds on the list are current members of the sector and, as would be expected given they have been included in the table, have made strong returns for investors over recent years.
Unicorn UK Income, which is in second from a total return point of view, also hunts in the lower end of the market-cap spectrum and as a result has been a persistent presence at the top of the sector’s performance tables. Likewise, Royal London UK Equity Income with its preference for mid-caps has enjoyed strong recent years.
Standard Life Investments UK Equity Income Unconstrained is another fund that makes efforts to differentiate itself from the ‘typical’ UK equity income fund by paying no attention to the underlying index and an avoidance of the usual high-dividend paying stocks and sectors.
More conventional equity income exposure in the list of top performers comes in the form of funds such as Trojan Income, Threadneedle UK Equity Alpha Income and Threadneedle UK Equity Income, which pay greater attention to large and mega-caps than the above funds.
But what of the former IA UK Equity Income funds?
Our data shows that none are in the top quartile for both capital growth and income payouts but several have come close; the performance and quartile rankings of all the existing exiles are shown below.
Source: FE Analytics
Five of the 15 funds have outperformed their average peer when it comes to the contribution of income to total return after achieving second-quartile number numbers.
Evenlode Income leads this particular bunch of funds when it comes to total return, capital growth and income payouts. The fund only recently left the UK equity income sector and sparked controversy when it did, as it was seen as one of the peer’s groups leading lights.
While its income contribution is in the second quartile, it is so by the slimmest of margins – another 31 basis points and it would have been in the top quartile by equalling the payout of Threadneedle UK Equity Income.
Total return and price performance of fund over 5yrs to end of May 2016
Source: FE Analytics
Other second quartile names include Invesco Perpetual UK Strategic Income, Rathbone Income and Henderson UK Equity Income & Growth.
That said, there are four exiles in the fourth-quartile for the five-year income returns: Jupiter Responsible Income, JPM UK Strategic Equity Income, SJP Equity Income and Elite Webb Capital Smaller Companies Income & Growth.
