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UK equity income funds to diversify the ones you likely already own

15 November 2016

FE Trustnet looks at the funds least correlated to the three largest portfolios in the IA UK Equity Income sector and compares their performances.

By Jonathan Jones,

Reporter, FE Trustnet

The IA UK Equity Income sector remains popular with investors in the current environment, given the ongoing search for yield and lack of promising income opportunities in large parts of the bond market. 

With mining stocks slashing (or scrapping) their dividends in 2015, banks yet to return to the dividend roster and expensive defensives at new price highs making their dividend yield unattractive to new investors, income through equities has also been particularly hard to come by this year.

Despite this, data from Capita shows that UK dividends are expected to increase in the fourth quarter of 2016 for the seventh straight quarter.

Graph to show UK dividends quarter-on-quarter since 2008

 

Source: Capita UK Dividend Monitor

They have been boosted this year by the Brexit result in June and the subsequent fall in the pound against the dollar, with a number of dividend payers in the FTSE 100 reporting in the US currency.

This has helped to maintain confidence in the UK equity income space, not just among income investors but among those seeking the attractive total returns that can come with investing in dividend-paying companies.

As a result, the IA UK Equity Income sector remains one of the largest in the Investment Association universe, with the three largest funds in the sector managing more than £19bn even after the departure of some heavyweights in recent years.

With investors backing these three funds, FE Trustnet looks at other funds within the sector they may wish to consider to diversify their exposure to this part of the market.

We start with FE Alpha Manager Neil Woodford’s CF Woodford Equity Income fund, which yields 3.37 per cent, has a clean ongoing charges figure of 0.75 per cent and is by far the largest in the sector at £9.2bn.

Woodford (pictured) is known for providing returns over a longer period of time, aiming to protect capital in times of volatility.

While this means the fund may miss out on a market rally, it provides downside protection during falling or flat markets and has been the best performer in the IA UK Equity Income sector since it launched in June 2014.

Performance of fund vs sector and benchmark since launch

 

Source: FE Analytics

The fund, which focuses primarily on large-caps with a sprinkling of smaller companies, has returned 25.68 per cent since launch.


The below table shows the eight funds least correlated to CF Woodford Equity Income since launch, with UBS UK Equity Income, CF Miton UK Multi Cap Income and MI Chelverton UK Equity Income holding the top spots.

 

Source: FE Analytics

As can be seen, the fund with lowest correlation is the £2.6m UBS UK Equity Income fund, run by Steven Magill.

It has had a particularly strong year in 2016, returning 27.46 per cent, after two consecutive years of losses putting it in the bottom quartile in 2015 and 2014. Since launch in March 2007, the fund has made a bottom-quartile 43.42 per cent total return.

The fund, which yields 3.8 per cent and has an OCF of 1 per cent is invested in the previously under loved sectors of the market including banks, miners and oil. Indeed, among its top 10 holdings are BP and Shell, as well as Barclays and Lloyds banks and miners Anglo American and Glencore, which have been very strong year-to-date.

Meanwhile, Neil Woodford tends to invest in more traditional defensive holdings, such as tobacco stocks and insurance companies, with a large weighting also to the pharmaceutical sector.

The other lowly correlated fund, CF Miton UK Multi Cap Income, has struggled this year as mid and small-caps – its favoured hunting ground – were hit by the EU referendum, but it does have a strong longer term track record and is the sector’s best performer over five years.

The five crown-rated £741m fund run by Gervais Williams and FE Alpha Manager Martin Turner invests in a number of companies lower down the market-cap spectrum, with 33 per cent of the fund invested in AIM-listed stocks.

While Woodford is also known for mixing in smaller companies among his portfolio, this fund – which yields 4.09 per cent and has an OCF of 0.82 per cent – has a much stronger focus on the smaller end of the market, with only 14.5 per cent invested in the FTSE 100.

Away from Woodford, the second and third largest funds in the sector are Artemis Income and Threadneedle UK Equity Income, which have assets under management of £6.3bn and £3.5bn respectively.


As these funds have a longer track record than Woodford, we have looked at correlations over a five-year timeframe. Both have outperformed the sector and benchmark over this period, returning 79.50 per cent and 68.44 per cent respectively.

Performance of funds vs sector and benchmark over 5yrs

 

Source: FE Analytics

Richard Colwell’s five FE Crown-rated Threadneedle fund, which yields 3.9 per cent and has an OCF of 0.82 per cent, sits in the top quartile over five years while Nick Shenton and Adrian Frost’s Artemis Income yields 4.38 per cent, has an OCF of 0.79 per cent and is in the second quartile over the past half-decade.

However, the two best performing funds over the past five years have been those weighted to the small and mid-cap sectors, with CF Miton UK Multi Cap Income the best performer and one of the least correlated to the two above.

 

Source: FE Analytics

Small- and mid-caps appear to be a common trend for the funds with the lowest weighting to the Threadneedle and Artemis funds.

Unicorn UK Income, which has the lowest correlation to both funds, is among the five best performers over five years, returning 97.36 per cent.

Run by Simon Moon and FE Alpha Manager Fraser Mackersie, the £637m fund, which yields 4.52 per cent and has an OCF of 0.81 per cent, invests in the full spectrum of the market, with small caps including BBA Aviation, Marston’s and Conviviality among its top 10 holdings.

Also of note is the MI Chelverton UK Equity Income fund, run by David Horner and David Taylor, which has been the second best performer over the past five years. It is also very lowly correlated to CF Woodford Equity Income

The £434m fund, which yields 3.51 per cent and has an OCF of 0.92 per cent, is fairly evenly split across the market, with 30 per cent invested in companies with a market capitalisation above £1bn, and more than 60 per cent invested in companies ranging from £1bn to £100m.

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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.