MI Chelverton UK Equity Income, Trojan Income and Artemis Income are examples of funds that have managed to constantly stay in the upper deciles of the IA UK Equity Income sector, according to research by FE Trustnet.
In a recent article, we looked at the IA UK All Companies sector to see which members had consistently been among the peer group’s highest returners over rolling three-year periods. Names such as Fidelity Special Situations, AXA Framlington UK Select Opportunities and Invesco Perpetual Income were at the top of the list.
While we saw that the average IA UK All Companies fund has narrowly underperformed the FTSE All Share since the turn of the millennium, funds in the IA UK Equity Income sector have done much better. Our data shows that the average UK equity income member has made 167.96 per cent since 1 January 2000, outperforming the index by 61.38 percentage points.
Performance of sectors vs index since 1 Jan 2000
Source: FE Analytics
In this article, we wanted to look at the funds that have consistently sat in the upper deciles over rolling three-year periods.
To do this, we look at funds’ three-year returns on a quarterly basis over the period spanning 1 January 2000 through to 31 September 2016 then worked out the average decile ranking. Not every fund has a long enough track record to have a ranking in every period looked at, but we have kept all in the study apart from those launched after 1 January 2011.
After removing the funds with the shortest track records, there are 62 remaining in the sector. Only 10 of these have an average decile ranking of below four while eight have an average of eight or higher.
As can be seen in the table below, MI Chelverton UK Equity Income leads the pack after achieving an average three-year decile ranking of 1.64 per cent since its launch in 2007.
The £459.4m fund, which is managed by David Horner and David Taylor, focuses on small-caps, which goes some way in explaining its strong performance record. Since launch, the fund has been the ninth best performer in the sector after making more than 80 per cent.
Source: FE Analytics
MI Chelverton UK Equity Income has been a persistent member of the sector’s top decile in every one of the three-year periods since mid-2008, but recently slipped into the fourth decile after the Brexit result hit small- and mid-cap stocks hard.
The managers concede that their domestic-facing portfolio was in the firing line when investors fretted over the impact of Brexit on the UK economy, but point out that many economic forecasters have started to predict this will not be as severe as first feared.
“It is still the case however that a number of our ‘Brexit’ sensitive stocks, predominately housebuilders, estate agents and retailers are still trading at levels substantially below those immediately prior to the vote. This reflects fears that the general macro uncertainty will reduce the volume of housing transactions and retailers may have to absorb some of the inevitable price inflation on imported goods if consumer confidence remains fragile,” they said in their July update.
“It is interesting to note that six weeks after the vote commentators now appear to be discussing the extent to which domestic GDP forecasts will have to be reduced rather than how deep the recession will be.”
Other funds that invest lower down the market cap spectrum and have made consistent upper decile returns include Montanaro UK Income and Unicorn UK Income. However, much of the list is taken up with ‘conventional’ UK equity income funds that favour dividend stalwarts from the FTSE 100.
Trojan Income, Artemis Income and Threadneedle UK Equity Alpha Income are three such funds, achieving average three-year decile rankings of 3.11, 3.13 and 3.27 respectively. They have produced some of the sector’s highest returns over the long run.
Performance of funds vs sector and index over 10yrs
Source: FE Analytics
All three have a strong presence of traditional defensive large-caps such as GlaxoSmithKline, Imperial Brands and Centrica in their top 10 holdings.
This has helped them to perform strongly on a range of metrics over the past 10 years. All are in the top quartile of their peers for alpha generation, maximum drawdown, annualised volatility and Sharpe ratio, for example.
Trojan Income has the sector’s best numbers of all of the above metrics, apart from alpha generation where it is in second place. FE Alpha Manager Francis Brooke uses the cautious investment approach favoured for all the funds run by Troy Asset Management, which tends to result in steady returns and low volatility.