Franklin UK Equity Income, Smith & Williamson UK Equity Income and Threadneedle UK Monthly Income are among a handful of top-performing funds in the IA UK Equity Income sector in terms of income, consistency of returns and attractive ongoing charges fees, according to research from FE Trustnet.
These funds are three of five investment vehicles out of 81 within the sector that passed through a series of filters to find the inexpensive funds that are paying out relatively high levels of income.
Firstly, only funds with the same manager over three years were selected to provide fairer results, whittling the number of funds down to 63.
We then excluded all funds that had an above-average clean ongoing charges figure (OCF) for the sector – out of all 81 funds, the average OCF was 0.94 per cent.
The next step was to calculate the average income earned from all funds within the IA UK Equity Income sector over three years, which amounted to a payment of £1,281.83 based on a £10,000 investment. We then removed all funds that had earned an income lower than this.
While these funds were predominantly selected based on attractive returns combined with low charges, performance cannot be ignored and any fund that found itself in the bottom quartile for its total return or annualised returns over three years was excluded. This, of course, comes with the usual caveat that past performance is no guide to the future.
It should also be noted that ‘income maximising’ funds have been left out of the study, as these have slightly different mandates and have a far greater focus on income than they do returns. Vanguard’s equity income index tracker – which is the sector’s cheapest member at 0.22 per cent – didn’t make it through as income has been below the average.
Out of the funds that have passed through the filters, the investment vehicle that has achieved the highest level of income over three years is Smith & Williamson UK Equity Income, which is also has the third-lowest OCF out of the funds in this article at 0.72 per cent. If an investor had put £10,000 into the fund three years ago, they would have earned £1,475.87 in income.
It has been managed Tineke Frikkee since 2013, while co-manager Mark Swain has worked on it since 2011. Over the duo’s tenure, the five crown-rated fund has returned 32.75 per cent, outperforming its sector average and FTSE All Share benchmark by 6.99 and 12.84 percentage points respectively.
Performance of fund vs sector and benchmark under Swain and Frikkee
Source: FE Analytics
On an annualised basis, the fund has found itself comfortably in the second quartile versus its average peer in 2013, 2014, 2015 and year-to-date. This means that, in terms of its risk metrics, the £49.9m fund is in the top quartile for its annualised volatility and Sharpe ratio (which measures risk-adjusted returns) over Frikkee’s tenure. It is in the second quartile for its maximum drawdown, which measures the most potential money lost if bought and sold at the worst possible times.
The 47-stock fund is able to invest across the cap spectrum; it is overweight the FTSE 250 by 11.5 percentage points with a weighting of 27 per cent and holds more than three times the amount of small-caps that its benchmark does at 11.4 per cent.
Following closely behind on the list for the highest income earned over three years is Franklin UK Equity Income, which would have earned investors £1,474.03 on a £10,000 initial investment.
The fund’s OCF is significantly below average for both its entire sector and its peer group composite and is the lowest in the article at 0.54 per cent. It currently yields 4.08 per cent.
It is managed by Colin Morton, who has run the fund for more than 20 years, and is deputy-managed by FE Alpha Manager Ben Russon and Mark Hall who joined in 2013.
Over three years, the fund has more than doubled its FTSE All Share benchmark with a total return of 28.18 per cent – this is an outperformance of its sector average of 10.58 percentage points. It is in the second quartile for its maximum drawdown and annualised volatility over the same time frame and is in the top quartile for its Sharpe ratio.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
On an annualised basis, the fund was top quartile over 2014 and 2016 and is in the third quartile over 2015 and 2013. Over the last decade, the five crown-rated fund has fallen into the bottom quartile twice – once in 2009 and again in 2010.
Morton aims to provide a growing level of income as well as capital growth over the medium-to-long term, which he defines as between three and five years.
He adopts a bottom-up approach to stock selection and looks for valuation anomalies in markets caused by short-term noise. The fund’s 53-stock portfolio includes the likes of Royal Dutch Shell, British American Tobacco and GlaxoSmithKline in its list of top 10 holdings.
Third on the list for the amount of income earned over three years is CF Canlife UK Equity Income, which has been headed up by Craig Rippe since 2004 who was joined by co-manager Eugene O’Neill in 2013.
The £147m fund would have earned investors an income of £1,374.52 if they’d have put in £10,000 three years ago – and it has an OCF that is comfortably lower than its sector average at 0.84 per cent.
The fund, which yields 4.3 per cent, has three FE Crowns and predominantly holds its largest positions in large and mega-caps such as Imperial Brands, HSBC Holds and BT Group. It is benchmarked against the FTSE All Share, however, and is able to invest across the cap spectrum.
Over three years, CF Canlife UK Equity Income has returned 18.21 per cent, which is broadly in line with its peers and a 5.07 percentage point outperformance of its benchmark. It is in the third quartile for its annualised returns in 2013, 2014 and year-to-date, although it delivered a top-quartile return in 2015.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
While it may not have shot the lights out in terms of its performance, it is in the top quartile for its maximum drawdown over three years and is in the second quartile for its annualised volatility.
Next up is Royal London UK Equity Income, which has five FE Crowns and has been managed by Martin Cholwill since 2005.
The £1.6bn fund yields 4.12 per cent and would have made investors a total of £1,355.17 if they’d put £10,000 into the fund three years ago. It also boasts the second-lowest OCF out of the group at 0.67 per cent.
The manager will hold between 40 and 60 stocks at any one time and will only have a limited exposure to small-caps or companies below £1bn in size. He will also hold an approximate 50 per cent weighting to large-caps and counts Royal Dutch Shell, GlaxoSmithKline and British American Tobacco as his three largest positions.
Over three years, the fund has achieved a top-quartile return of 29.36 per cent, which is almost double that of its benchmark and 11.76 percentage points more than its peer average. It is also in the top quartile for its returns over one, five and 10 years as well as over the last three and six months.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
On an annualised basis, the fund is in the top quartile for its returns in 2013, 2014 and year-to-date, although it slipped into the third quartile for its return last year.
The final fund to make it through the filters is Threadneedle UK Monthly Income, which has the highest OCF of the group at 0.87 per cent. It yields 4.3 per cent and, if an investors had put £10,000 into the fund three years ago, they would have received £1,336.09 in income.
The four crown-rated fund has been managed by Jonathan Barber since 2002 and has a large-cap value tilt – it currently holds 62 stocks including Imperial Brands, AstraZeneca and Royal Dutch Shell.
These stocks are selected by focusing on forces of change within economies and the companies that will be set to benefit from these – the manager looks at trends on a global basis rather than looking at the UK in isolation.
Over three years, the fund has returned 22.87 per cent, outperforming its average peer and benchmark by 4.97 and 7.71 percentage points respectively and, on an annualised basis, it is in the second quartile for 2013 and 2015. It is also in the top quartile for 2014 and is in the third quartile year to date.
Performance of fund vs sector and benchmark over 3yrs
Source: FE Analytics
The £576m fund has also achieved a top-quartile Sharpe ratio, maximum drawdown and annualised volatility over the same time frame.
