Sanlam Private Wealth’s White List – a study of the best performing UK equity income funds – has seen Francis Brooke’s Trojan Income knocked off the top of the buy-list following challenging conditions in the latter half of 2016.
The five crown-rated, £768.3m CF Miton UK Multi Cap Income fund – a new entrant to the White List – has taken the top position from the Troy fund.
The White List is made up of funds with assets under management of more than £20m that have produced superior total returns over five years.
The Miton fund, overseen by industry veteran Gervais Williams and FE Alpha Manager Martin Turner, topped the list based on the seven metrics studied by Sanlam.
“Williams and Turner’s fund has produced solid returns on a consistent basis, despite having a weaker 2016 compared to its own history,” Sanlam noted. “Furthermore, the fund has low volatility compared with peers as well as successfully providing more income than most over the past five years.”
Performance of funds over 5yrs
Source: FE Analytics
The fund was up by 130.16 per cent despite a dip in performance following the UK referendum result last year.
The Trojan Income fund slipped 18 places into the Grey List – a temporary home for funds with out-of-favour styles or “an early warning signal for a fund in decline”.
Sanlam noted that performance had “not been as strong as it was previously”, adding that its quality style bias had started to move out of favour while the level of income over the past five years was “much lower than peers”. The fund was up by 77.11 per cent over five years to the end of last year.
As well as the change at the top of the table, heightened levels of uncertainty in markets saw eight funds exit the White List making way for three new entrants.
Indeed, change at the top was symptomatic of the higher levels of volatility seen in the UK equity market over the past year.
“Whilst equities continue to have an important role to play in income generation, this asset class has become more volatile,” the firm noted. “It is undeniable that there are opportunities investors can exploit, including reaping larger dividends from the translation effect and investing in stocks at a discount.”
However, Sanlam also noted the potential for further uncertainty in the coming year as the UK prepares to leave the EU.
One of the three new entrants to the White List was the Schroder Income Maximiser fund. The two crown-rated, £1bn fund overseen by Kevin Murphy, Nick Kirrage and Mike Hodgson returned 84 per cent in the five years to 31 December 2016.
The fund was previously managed by Thomas See until he left the firm following a reorganisation in July last year.
Performance of fund vs sector over 5yrs
Source: FE Analytics
The fund uses a covered call overlay to boost dividend yields targets an income of 7 per cent per annum and invests in value stocks.
According to Sanlam, the fund ranked first for performance over five years and was also top-ranked for income provided over the period.
Another new entrant to the list was the JOHCM UK Equity Income fund, which ranked higher thanks to strong performance in 2016.
The £2.9bn fund, managed by James Lowen and Clive Beagles, has returned 93.03 per cent in the five years to 31 December 2016.
The MFM Slater Income fund, co-managed by FE Alpha Manager Mark Slater, Barrie Newton, Ralph Baber and Nigel Milton, was another new entrant to the White List in December.
Despite not performing strongly in 2016, noted Sanlam, the fund “has done tremendously well in terms of performance in previous calendar years”.
The £114.7m fund, which aims “to produce an attractive and increasing level of income in addition to seeking long term capital growth from a portfolio of investments”, has produced a 93.68 per cent return over the five years under review.
As well as new entrants to the White List, a number of funds were relegated to the Grey list for review.
Joining the Trojan Income fund in the Grey List were Tineke Frikkee’s Smith & Williamson UK Equity Income fund and Michael Clark’s Fidelity MoneyBuilder Dividend funds.
According to Sanlam, long-term income investor Frikkee only just missed out on inclusion in the White List after posting a weaker yield than in the previous study and moving down in performance rankings.
There were few changes to the Black List, Sanlam’s list of consistent underperformers. The Scottish Widows UK Equity Income fund remained in bottom position of the rankings. It was joined at the bottom by HSBC Income and Aberdeen UK Equity Income.
Performance of funds over 5yrs
Source: FE Analytics
Commenting on market conditions over the past half year, Sanlam chief investment officer Phil Smeaton says while uncertainty has had an impact on markets, UK income funds “have been only mildly affected”.
He said: “The most obvious benefit to UK income fund investors is on the income side: many UK dividend paying companies are multinationals with significant dollar denominated earnings and revenue.
“It is also important to note that equities do continue to have an important role to play in income generation, but as evidenced by the change in fund rankings, this has become a trickier and more volatile asset class to navigate than in the past.”
Smeaton says while there are potential opportunities that managers can exploit, the UK market is “entering an environment which has not been experienced before”.
He added: “The risk of uncertainty is high and there are many questions unanswered about the UK’s exit from the EU which could potentially have a positive or negative effect on the markets.”