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The UK equity income funds that don’t rely on the FTSE 100’s highest-yielders

17 January 2017

FE Trustnet looks at the funds in the IA UK Equity Income sector that don’t hold any of the 10 highest-yielding blue-chip stocks in their list of top 10 holdings.

By Lauren Mason,

Senior reporter, FE Trustnet

Out of 82 funds in the IA UK Equity Income sector, 11 of them don’t hold any of the 10 highest- yielding FTSE 100 stocks within their list of largest holdings, according to research from FE Trustnet.

This comes following concerns that funds in the sector are forced to chase yield over quality as, under current guidelines, they must achieve a yield that is 10 per cent higher than the FTSE All Share index’s over rolling three-year periods.

This was called into question last year when many industry professionals argued that the unusual landscape for equity income investors meant they would be taking on too much risk simply to remain in the sector.

In April, Hargreaves Lansdown’s Laith Khalaf said: “The current IA UK Equity Income rules reward failure and punish success.”

“They lead to the absurd situation where an income manager can get kicked out of the sector because they have done a good job in growing investors’ capital. It’s high time the IA UK Equity Income sector definition was reviewed to stop good funds being expelled from the sector on a technicality.”

As to be expected though, many fund managers in the IA UK Equity Income sector argue that it is indeed possible to run a successful fund that offers minimal risk, capital appreciation and sufficient income without simply having to choose all of the highest-yielders in the index (an example of whom is FE Alpha Manager Siddarth Chand Lall, whose interview with FE Trustnet will be published later this week).

As such, we have taken a look at the top 10 holdings of all the funds currently in the sector to see how many of them are meeting the Investment Association’s minimum yield requirement without relying on the highest-yielders in the blue-chip index.

10 highest-yielding stocks in the FTSE 100 index

 

Source: Dividend Data, FE Analytics 

While a total of 19 funds in the sector hold one or less of the highest-yielding blue-chip in their list of 10 largest portfolio constituents, 11 have avoided holding any of these at all.

This could mean they sit well with more conventional UK equity income holdings or that they’re appealing to investors in their own right, given their willingness to branch out into less well-known areas of the market. The 11 funds are listed in the below table:

UK equity income funds with none of the 10 highest-yielding stocks in their top 10 holdings

 

Source: FE Analytics

While some of these – such as the overseas Guinness UK Equity Income and HC KB Enterprise Equity Income funds – are unavailable on most platforms, others are more retail and adviser-friendly, such as the five crown-rated CF Miton UK Multi Cap Income fund.


It is headed up by Gervais Williams (pictured) and FE Alpha Manager Martin Turner, both of whom are well-known for their focus on stocks that are further down the cap spectrum.

For instance, while the £743m fund has 15.1 per cent of its portfolio in FTSE 100 stocks, its largest weighting is in FTSE AIM stocks, which account for approximately one-third of the portfolio.

Given the small size of many of its holdings, the fund is well-diversified and consists of 150 stocks in total. Its largest holdings include litigation finance firm Burford Capital, gift and greetings card manufacturer IG Design and shipping service firm Stobart Group.

If an investor had placed £10,000 into the fund five years ago, they would have received £3,129.94 in income alone. The fund has also returned 130.47 per cent over this time frame, which is a 59.87 per cent outperformance of its sector average.

Performance of fund vs sector over 5yrs

 

Source: FE Analytics

Another top-performing UK income fund that doesn’t hold any of the highest yielding blue-chips in its top 10 list is the four crown-rated Montanaro UK Income fund, which invests predominantly in small- and mid-cap companies.

The £145m fund has a portfolio of 50 stocks, the largest of which include Taylor Wimpey, Jupiter Fund Management and Big Yellow Group.

Over the last five years, the fund – managed by Charles Montanaro – has returned 104.78 per cent and would have paid investors £2,400.13 in income based on a £10,000 investment.

The £632m Unicorn UK Income fund is another example of an investment vehicle in the sector that has strayed away from the FTSE 100’s highest-yielders but has nevertheless achieved attractive levels of growth and income.

It has been headed up by FE Alpha Manager Fraser MacKersie and Simon Moon since 2014, following the death of previous manager John McClure.

While the lead management has changed, MacKersie and Moon had worked on the fund before 2014 and have strived to keep the fund’s investment process as similar to McClure’s as possible.

For instance, the pair aim to provide growing levels of income through a genuine multi-cap portfolio, with BBA Aviation, Primary Health Properties and manufacturing company Marshalls foremost among the fund’s list of top 10 holdings.


Over five years, it has returned 115.02 per cent and would have paid out £3,141.81 in income based on a £10,000 investment.

Performance of fund vs sector and benchmark over 5yrs

 

Source: FE Analytics

As with the aforementioned funds, David Horner and David Taylor’s £431m Chelverton UK Equity Income fund has managed to achieve a yield that is 10 per cent higher than the FTSE All Share’s by holdings stocks from further down the cap spectrum.

It aims to provide investors with a growing stream of income through fully-listed and AIM stocks that offer high initial dividends, progressive dividend payments and long-term capital appreciation. Its largest holdings include Galliford Try, plant and machinery hire firm Lavendon Group and insurance agency Phoenix Group.

If an investor had placed £10,000 into the fund five years ago, they would have received £3,668.48 in income. It has also returned 126.22 per cent over the same time frame.

In terms of the IA UK Equity Income funds that only hold one of the top 10 yielding FTSE 100 stocks, star long-term performers include Marlborough Multi Cap Income, Threadneedle UK Equity Income and Standard Life UK Equity Income Unconstrained.

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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.