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The UK equity income funds that have truly helped you sleep at night

21 June 2016

Following on from last week’s article, we look at the UK funds that are paying investors a regular income while also boasting attractive risk metrics, steady annualised performances and long-term track records.

By Lauren Mason,

Reporter, FE Trustnet

Threadneedle UK Equity Alpha Income, Artemis Income and Liontrust Macro Equity Income are among a small handful of UK equity income funds that have long-standing managers, have achieved steady returns over the last decade and have scored highly for major risk metrics, according to data from FE Analytics.

As the EU referendum looms ever closer, UK investors would be forgiven for becoming increasingly cautious on their home market.

As such, the prospect of a fund that pays out regular income as well as delivering growth may provide investors with greater comfort as we head into unchartered waters from the end of this week.

In a bid to find the best possible IA UK Equity Income funds for the very cautious investor, FE Trustnet has excluded all funds in the sector that haven’t had the same manager for the last 10 years in order to accurately measure their long-term track records.

We then removed all funds that have fallen below the second quartile over the last decade for their annualised volatility, Sharpe ratio (which measures risk-adjusted returns), downside risk (which measures potential to suffer a decline during falling markets) and maximum drawdown (which measures the most potential money lost if bought and sold at the worst possible times).

Each of the remaining funds’ annualised returns were then looked at over the last 10 years and any that have fallen into the bottom quartile more than twice over the past 10 calendar years were stricken from the list.  

This left us with six funds from 79 within the sector, although of course past performance is no guide to future returns.

The overall winner was Artemis Income, which is in the top quartile for all aforementioned risk metrics over the last decade and has stayed out of the bottom quartile for returns every year over the same time frame.

The four crown-rated fund has been headed up by Adrian Frost (pictured) and Adrian Gosden since 2002 and 2003 respectively, who were then joined by co-manager Nick Shenton in 2014. However, it was announced yesterday that Adrian Gosden will leave the firm at the end of the month.

The £6.1bn fund has a focus on stocks with good free cash flow generation and the managers will prioritise this over more traditional earnings measures. Their stock selection process has led to a portfolio of 67 holdings spread across a wide range of different sectors – some of its largest holdings include AstraZeneca, Lloyds, Imperial Brands and RELX Group.

The Square Mile team, which has awarded the fund an ‘AA’ rating, said: “The team's focus on free cash flow, while not unique, does guide the managers towards more robust situations and it helps highlight the potential risks in companies' business models.”

Over the last decade, the fund has returned 92.83 per cent, which is at least 30 percentage points than both its sector average and its FTSE All Share benchmark.

Performance of fund vs sector and benchmark over 10yrs

 

Source: FE Analytics

If an investor had put £10,000 into the fund 10 years ago, they would have received £4,653.08 in income. Artemis Income yields 4.08 per cent and has a clean ongoing charges figure (COF) of 0.79 per cent.

Next on the list of steady funds for UK income investors is Threadneedle UK Monthly Income, which is in the top quartile for its annualised volatility, maximum drawdown, downside risk and Sharpe ratio over the last decade.

It has also only fallen into the bottom quartile for its annualised return in one calendar year over the same time frame – this was in 2009, when it returned 15.78 per cent, which was just more than half of the FTSE All Share’s annualised return and 7.1 percentage points less than its sector average.

That said, it was in the top quartile in 2006, 2007, 2011 and 2014 and has been above-average during eight out of the last 10 years to the end of 2015.


The four crown-rated fund has been managed by Jonathan Barber since 2002 and, over this time frame, it has returned 156.37 per cent, outperforming its sector average and benchmark by 27.65 and 38.31 percentage points respectively.

Performance of fund vs sector and benchmark under Barber

 

Source: FE Analytics

If an investor had put £10,000 into the fund at the start of Barber’s tenure, they would have earned an income of £6,490.58.

The manager selects stocks based on economic and market changes and how these will benefit certain companies – it currently holds the likes of Royal Dutch Shell, Imperial Brands, BT Group and GlaxoSmithKline within its 65-stock portfolio.

The £592m fund yields 4.2 per cent and has a clean OCF of 0.88 per cent.

The third fund to meet all of our criteria is also a Threadneedle offering – FE Alpha Manager Leigh Harrison’s four crown-rated Threadneedle UK Equity Alpha Income has a top-quartile downside risk, maximum drawdown and Sharpe ratio and is in the second quartile for its annualised volatility over 10 years.

Harrison, who was joined by co-manager Richard Colwell in 2010, adopts a similar approach to the aforementioned fund as Threadneedle’s equity income approach is very much team-based and draws on similar resources. It must be noted that Harrison is to retire at the end of the month, however.

Unlike Threadneedle UK Monthly Income, though, the manager holds a concentrated portfolio of between 30 and 40 stocks with up to 15 of the highest-conviction plays accounting for up to half of the entire portfolio – these currently include Shell, Imperial Brands, Shell and Centrica.

In terms of its annualised performance, the fund fell into the bottom quartile in 2009 and last year, when it returned less than half that of its sector average.

However, it is in the top quartile during six out of the last 10 years and, over the last decade, it has outperformed both its sector average and benchmark by more than 40 percentage points with a total return of 111.44 per cent. Over the same time frame, if an investor had put £10,000 into the fund, they would have by now received £5,164.10 in income.

Performance of fund vs sector and benchmark over 10yrs

 

Source: FE Analytics

Threadneedle UK Equity Alpha Income has a clean OCF of 0.87 per cent and yields 4.6 per cent.

Almost level-pegging in fourth and fifth place are Liontrust Macro Equity Income and HL Multi Manager Income & Growth. The former is in the second quartile for all aforementioned risk metrics aside from maximum drawdown, which it is in the top quartile for.

The latter is also second quartile across all metrics except its top-quartile annualised volatility over the last decade.


Liontrust Macro Equity Income has found itself in the bottom quartile once over the last 10 years – in 2012 – and HL Multi Manager Income & Growth is only in the bottom quartile year-to-date.

The first fund has been headed up by FE Alpha Manager duo Jan Luthman and Stephen Bailey since its launch in 2003 – they were then joined by co-manager Jamie Clark in 2004.

As its name suggests, the managers adopt a top-down stock selection process when choosing holdings for their £535m fund – it currently holds 52 stocks including Vodafone, BT Group, GlaxoSmithKline and British Land Plc.

If an investor had put £10,000 into the fund a decade ago, they would have earned £5460.26 in income and benefitted from a total return of 84.8 per cent. If an investor had put the same amount of money into HL Multi Manager Income & Growth – which is a fund of funds managed by Lee Gardhouse since 2002 and Ellen Powley since 2006 - they would have earned an income of £4,156.29 and acheived a total return of 81.41 per cent.

Performance of funds vs sector and benchmark over 10yrs

 

Source: FE Analytics

The former has a clean OCF of 0.88 per cent and yields 4.21 per cent while the latter has a clean OCF of 1.32 per cent and yields 3.91 per cent.

The final fund on the list is Franklin UK Equity Income, which is in the second quartile for its maximum drawdown, downside risk and Sharpe ratio over 10 years and is in the top quartile for its annualised volatility.

Over the same time frame, it has been in the bottom quartile on an annualised basis during 2009 and 2010 and has achieved above average returns during four of the last 10 years to the end of 2015.

The £178m fund has been managed by Colin Morton since 1995, who was then joined by deputy managers FE Alpha Manager Ben Russon and Mark Hall in 2013. Since Morton has been at its helm, the four crown-rated fund has returned 539.7 per cent, compared to its sector average’s return of 403.23 per cent and its benchmark’s return of 346.48 per cent. Over the same time frame, investors would have received £17,348.28 in income if they had put £10,000 into the investment vehicle.

Performance of fund vs sector and benchmark under Morton

 

Source: FE Analytics

Morton combines top-down analysis with value-oriented bottom-up stock picking and looks for large companies with strong and growing cash flows – some of his largest holdings include Shell, AstraZeneca and BP.

Franklin UK Equity Income has a clean OCF of 0.84 per cent and yields 4.31 per cent.

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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.