As part of our recent FE Trustnet Select Event on UK equity income, we polled FE Trustnet readers to gauge sentiment towards the asset class and we found out that 43.77 per cent of you believe the FTSE 250 offers the most attractive income opportunities in the current environment. 
The results were of particular interest given that mid-caps have been underperforming FTSE 100 stocks throughout 2016 thanks to uncertainty prior to the EU referendum and the resulting Brexit-induced sterling weakness which has benefitted large-caps (which tend to be less domestically focused than companies in the FTSE 250).
On the other hand, FE Trustnet readers’ views make sense given that dividend cover is far higher in mid-cap land than across the FTSE 100 – with many expecting more blue-chip names to join the growing list of stocks that have had to cut their dividend on the back of poor earnings growth.
Source: FE Trustnet
Indeed, in an article earlier today Fidelity’s Michael Clark pointed out that he had been upping his exposure to mid-caps on valuation grounds and as Brexit uncertainty appears to have waned.
It is not too difficult for UK equity income investors to find funds that are overweight FTSE 250 stocks given the index makes up just 15 per cent of the FTSE All Share (which is 80 per cent weighted to the FTSE 100).
However, as always, there are certain funds that are taking massive off-benchmark bets on mid-caps.
In this article, we highlight the five IA UK Equity Income funds that currently have the biggest overweights to the market area.
TB Saracen UK Income – 41.9% in mid-caps
First up is the recently launched TB Saracen UK Income fund, which has a hefty 40 per cent in FTSE 250 stocks.
The tiny £2.3m fund – which was only launched in April 2015 – is managed by Scott McKenzie, who has previously managed the Aviva Inv UK Equity Income and Ignis UK Equity Income funds among others.
It has been a difficult start for the multi-cap portfolio, though.
Performance of fund versus sector and index since launch
Source: FE Analytics
While it initially outperformed in 2015 as mid and small-caps benefitted from the result of the general election and an improving UK economy, that overweight position in non-FTSE 100 stocks has hurt returns so far in 2016.
Indeed, it is currently the third worst performing member of the peer group this year after many of its domestically facing stocks were hit hard in the wake of the EU referendum. McKenzie still holds the likes of Berkeley Group, Lloyds and DFS as top 10 holdings, for example.
Nevertheless, this means the fund now yields 4.9 per cent and McKenzie is confident performance will now improve.
“Both the FTSE 250 and the FTSE Small Cap indices have now more than recovered their post Brexit losses,” he said in his latest note to investors.
“Given the fund’s bias towards medium and smaller companies, this is a welcome development. The fund had a strong month and rose 6.9 per cent, well ahead of the index. We continue to make good progress in eradicating the losses the fund endured post the referendum.”
Standard Life Investments UK Equity Income Unconstrained – 43.1% in mid-caps
This fund has also struggled in 2016 due to a focus on domestically orientated companies and a hefty 43.1 per cent weighting to mid-caps.
In fact, FE Alpha Manager Thomas Moore’s Standard Life Investments UK Equity Income Unconstrained fund has been the worst performing IA UK Equity Income portfolio in 2016 with losses of 3.97 per cent.
“It’s been a tumultuous period. I don’t think that many people in the investment management community were expecting a leave vote. We were picking stocks and looking for value and went into Brexit confident with the portfolio,” Moore said in a recent FE Trustnet article.
Nevertheless, due to the manager’s benchmark-agnostic style and preference for a growing dividend rather than a high starting yield, the £1.2bn fund has a strong long-term track record and amassed a decent following.
According to FE data, it has been a top decile performer since Moore took charge in January 2009 with returns of 216.7 per cent – meaning it has beaten the FTSE All Share by close to 100 percentage points over that time.
Performance of fund versus sector and index under Moore
Source: FE Analytics
Moore, whose fund yields 3.73 per cent, has also grown his dividend in each year over that time and is expecting 12 per cent dividend growth once again in 2016.
While some investors may have been shaken by Standard Life Investments UK Equity Income Unconstrained’s turbulent 2016, Moore says that while his fund has been hurt by Brexit, the outlook for domestic facing stocks isn’t as bad as many believe.
“What is really encouraging is the consistency of this [positive corporate commentary since Brexit] across the different companies within this portfolio. It’s maybe hard for people in this industry to get our heads around, but people are getting on with their lives.”
Currently, Moore counts the likes of Staffline, TUI, Virgin Money and Bovis Homes within his portfolio.
Unicorn UK Income – 44.3% in mid-caps
Next up is the Unicorn UK Income fund, which was one of the first members of the peer group to invest lower down the market cap spectrum for income.
The fund has a long track record of outperformance relative to both the sector and index thanks to the work of the late John McClure and its current management team of Simon Moon and FE Alpha Manager Fraser Mackersie have 44.3 per cent in FTSE 250.
Moon and Mackersie have endured a difficult time of it since McClure’s death in June 2014, as they had to deal with outflows during a period when small and mid-caps were out of favour with the wider market.
They took full advantage of the more supportive market conditions in 2015, but like many of their peers, have struggled in 2016 thanks to their weighting to non-FTSE 100 companies.
As such, the £700m Unicorn UK Income fund has been a bottom quartile performer and underperformed against the FTSE All Share since McClure’s death in June 2014 with returns of 6.25 per cent.
Performance of fund versus sector and index since June 2014
Source: FE Analytics
That being said, Moon and Mackersie – whose fund yields 4.3 per cent – has been gradually taking in money over the past two years as the managers have amassed a significant following among wealth managers and DFMs.
Moon also told FE Trustnet that a focus lower down the market cap spectrum was imperative at this point in the cycle.
“Companies are able to deliver high single digit or low double digit earnings growth. That’s really the attraction to small and mid-caps - that they’re able to provide sustained dividend income and growth matched by earnings per share growth,” he said.
Royal London UK Equity Income – 48.1% in mid-caps
While Martin Cholwill’s five crown-rated Royal London UK Equity Income fund counts the likes of Royal Dutch Shell, GlaxoSmithKline and British American Tobacco as its largest holdings, the manager also holds close to half of the portfolio in FTSE 250 stocks.
As such, due to that position in internationally-facing mega-caps it has been one of the best performers on this list over 2016 so far with returns of 9.19 per cent.
Cholwill has historically had a high weighting to mid-caps and he focuses on companies with strong market positions, cash-flow-backed dividend yields and robust balance sheets – a strategy that has worked well over the longer term.
The £1.7bn fund, which yields 3.8 per cent, has beaten the sector in nine out of the last 10 calendar years (the index in eight out of 10 years). As a result, it has been the third best performer in the sector since Cholwill became manager in March 2005 with returns of 191.48 per cent, beating its benchmark by 70 percentage points in the process.
Performance of fund versus sector and index under Cholwill
Source: FE Analytics
The manager recently told FE Trustnet that the outlook for UK equities was positive due to central bank intervention among other factors and in his latest note to investors he said he wouldn’t be changing his significant weighting to mid-caps anytime soon.
“Following the vote to exit the EU, I believe the UK is likely to experience an extended period of political and economic uncertainty,” Cholwill said.
“So far, consumer spending is holding up well, as evident in John Lewis weekly sales numbers and regional shopping centre footfall, despite a fall in consumer confidence surveys. We will continue to monitor economic developments closely, but I believe it best to avoid any knee-jerk changes to the portfolio until the implications of Brexit become clearer.”
Montanaro UK Income – 54% in mid-caps
The final fund on the list is the Montanaro UK Income fund, which is run by Charles Montanaro and has a hefty 54 per cent in FTSE 250 stocks.
Its list of top 10 holdings is also very domestically-orientated, with the manager – who focuses on high quality companies with strong balance sheets – counting the likes of Jupiter, St James Place, Taylor Wimpey, Cineworld and Hilton Food Group among his largest positions.
It is, however, going to be removed from the IA UK Equity Income sector for failing to meet the necessary yield requirement for the sector.
Nevertheless, it has certainly been a strong performer from a total return point of view over the years.
According to FE data, the £145m fund – which was once a pan-European smaller companies offering – has returned 29.32 per cent over three years, meaning it has been a top quartile performer over that time and nearly doubled the returns of the FTSE All Share.
Performance of fund versus sector and index over 3yrs
Source: FE Analytics
That being said, its focus on the domestic economy and preference for mid-caps means Montanaro UK Income has lost money in 2016 so far.
Since the EU referendum, though, the manager has been happy with the performance of a number of his largest holdings.
“The strongest contribution in July came from Jupiter, the UK asset manager, which reported a positive set of results and reassured the market that Brexit shouldn't hurt the business operationally,” Montanaro said.
“St. James's Place, the British wealth manager, moved higher after the company reported a strong set of results and confirmed it is very much business as usual. Taylor Wimpey, a British based housebuilding company, also increased after releasing reassuring half-year results.”