Invesco Perpetual’s stable of UK equity income vehicles as well as Rathbone Income and Henderson UK Equity Income & Growth are among the 10 funds to have consistently yielded less than their equity income peers over the past 15 quarters, according to the latest FE Trustnet study.
The relationship between yield and income has been a major talking point within the industry of late, with a number of portfolios now no longer deemed equity income funds by the Investment Association after failing to meet the IA UK Equity Income sector’s yield criteria (an 110 per cent yield of the FTSE All Share) – and have subsequently been booted across to the IA UK All Companies peer group.
While some say this is only right given the criteria has worked well over the longer term, others argue that the growing number of IA UK Equity Income exiles is due to extreme market conditions and that by focusing on yield, investors may well be at risk.
Against this backdrop, a recent FE Trustnet study highlighted the UK equity income funds (both those currently in the IA sector and those that have since been removed) that have yielded more than the sector average in each of the past 15 quarters – and how they have performed in terms of income pay-outs and capital growth over that period.
This time, though, we are turning the study on its head and focusing on the UK equity income funds that consistently yielded less than the average since January 2013.
The UK equity income funds with the consistently lowest yields
Source: FE Analytics
According to FE Analytics, there are 10 funds that have yielded less than average in each of the past 15 quarters – and they are highlighted in the table above.
The table also shows their average yield over the period, as well as their total dividend pay-outs and capital growth on £10,000 between January 2013 and December 2015.
Although not hugely surprising, all 10 funds are IA UK Equity Income sector exiles that now find themselves in the IA UK All Companies peer group. Indeed, all four of Invesco Perpetual’s UK equity income funds – which moved sectors between 2014 and 2015 – feature on the list.
Three of them (Invesco Perpetual High Income, Income and UK Strategic Income) are run by FE Alpha Manager Mark Barnett and are managed as total return (rather than purely income) propositions.
From a total return point of view, all three have beaten the FTSE All Share by more than 20 percentage points since January 2013. However, due to Barnett’s (and Neil Woodford’s before him) focus on high quality defensive companies, the yields on the funds have been gradually falling over the period as the share prices of those businesses have risen due to popular demand.
Funds’ and sector’s yield since January 2013
Source: FE Analytics
Like in the previous article, there is a correlation between a fund’s average yield and its income pay-outs relative to the sector average.
Indeed, both Barnett’s High Income and Income funds have both yielded some 70 basis points less – on average – than the average fund and paid out some £100 less in income on a £10,000 than the average over the period.
The same can be said for other funds on the list of lowest yielders, such as Elite Webb Capital Smaller Companies Income & Growth, JPM UK Strategic Equity Income, Henderson UK Equity Income & Growth and Carl Stick’s Rathbone Income.
However, the opposite is true with Barnett’s five crown-rated Invesco Perpetual UK Strategic Income fund.
Yield can be a poor guide to future income pay-outs as is it is calculated by dividing the previous year’s dividend by the current unit price – as FE Trustnet has noted on many occasions in the past.
Indeed, while Invesco Perpetual UK Strategic Income – which has more of a mid-cap bias than Barnett’s other two funds – has yielded 65 basis points less than the sector on average over the past 15 quarters, it has paid out more £40 more on £10,000 than the average over the period in dividends.
As mentioned earlier, the fund is run with a total return mind-set and that is certainly borne out in the data.
According to FE Analytics, investors who bought £10,000 worth of units in the income share class of the fund in January 2013 would not only have received a high level of income, but that original £10,000 would have grown to £15,000.50 by the end of 2015.
Price performance of fund versus sector between 2013 and 2015
Source: FE Analytics
Both Invesco Perpetual High Income and Income have also been top quartile for capital growth over that time.
Another IA UK Equity Income exile to feature on the list, which has paid out more than average in income, is Henderson Global Care UK Income.
The £163m fund, which is managed by Andrew Jones, aims to own companies the manager believes are contributing to social wellbeing and the protection and wise use of the natural environment.
Though its average yield over the past 15 quarters has been 3.58 per cent (compared to 3.85 per cent from the sector average), it has paid out £1,428.13 in dividends on a £10,000 investment over that time (compared to £1,305.52 from the sector average).
That hasn’t come at the price of capital, though, as Henderson Global Care UK Income is also top quartile for growing unitholders’ initial £10,000 lump sum.
Turning to the current members of the IA UK Equity Income sector and the list of consistent lowest yielders include Royal London UK Equity Income, Standard Life Investments UK Equity Income Unconstrained and Man GLG UK Income.
The IA UK equity income funds with the consistently lowest yields
Source: FE Analytics
Of the 12 funds on the list, all have yielded less than the sector in at least 10 of the past 15 quarters. However, only eight have paid out less than the average in total dividends over the period looked at in this study.
Those that have generated a higher level of income include Majedie UK Income, Royal London UK Equity Income and HL Multi Manager Income & Growth.