Despite sitting in the top quartile of the IA UK Equity Income sector last year, the Threadneedle UK Equity Income failed to outperform the FTSE All Share index for only the second calendar year of the past decade, according to data from FE Analytics.
In what was a year of challenges for many, the £3.5bn fund, run by Richard Colwell, underperformed the FTSE All Share by 2.7 percentage points.
Overall, the five crown-rated fund returned 13.78 per cent while the index was up by 16.75 per cent over the year, although the fund’s management team was still ahead of the IA UK Equity Income sector average of 8.85 per cent.
Performance of fund vs sector and FTSE All Share in 2016
Source: FE Analytics
John Husselbee (pictured), head of multi-asset at Liontrust Investment Partners, said: “I should think there were very few funds that outperformed from the UK equity income sector [last year] against the All Share.
“Overall the peer group had a pretty rough time against the index last year literally in terms of the game of two halves of what it was pre- and post-Brexit.”
He says sterling devaluation, a change to global environment of low growth and low inflation, a reflation trade and the return to favour of the value style meant many income managers struggled.
In an upcoming article FE Trustnet will examine in more detail at why the equity income sector struggled in 2016. Below, however, Husselbee suggests four fund investors with exposure to Threadneedle UK Equity Income may wish to hold to take advantage of some of these changes.
“There is a consideration to make. If you want income then in order to qualify for the income sector these funds have to yield a certain amount of income anyway.
“However, there are one or two alternatives as well outside that sector in the IA All Companies that still have a yield but not a yield sufficient enough to maintain themselves in that sector.”
The first fund he suggests is the £2.9bn JOHCM UK Equity Income, run by Clive Beagles and James Lowen.
The fund, which is currently soft-closed, was one of the few to beat the FTSE All Share last year, returning 16.79 per cent – ahead by just four basis points.
The fund, which currently yields 4.29 per cent and has a clean ongoing charges figure (OCF) of 0.81 per cent, has significant exposure to small and mid-cap stocks (39.7 per cent).
Its largest holding is Shell, followed by BP and HSBC – which all performed well at the end of 2016 as the value trade came back into favour.
Husselbee said: “They have a very distinctive investment style which was developed when he [Beagles] was at Newton.
“It means that every single holding on purchase has to have a yield premium of the market - a discipline that maintains him in a universe of stocks which maybe out of favour.”
Another fund he suggests is Schroder Income, run by FE Alpha Managers Nick Kirrage and Kevin Murphy (pictured). The £1.7bn fund, which is in the IA UK All Companies sector, returned 25.33 per cent last year thanks to its value-bias.
Performance of funds vs IA UK Equity Income sector and FTSE All Share in 2016
Source: FE Analytics
Husselbee said: “Schroders – particularly post the acquisition of Cazenove – have formulated very distinctive teams and the value team, which in this case runs the income fund, is very much about out-and-out value investing and I would say is a good complement to Threadneedle.”
The fund’s largest holding is HSBC followed by BP and GlaxoSmithKline with Royal Bank of Scotland its largest overweight at 4.8 per cent.
Schroder Income has an OCF of 0.91 per cent and currently yields 3.43 per cent.
Another option is the £2.2bn Jupiter Income Trust, run by Ben Whitmore, according to Liontrust’s Husselbee, though this is less of a pure value play than the others already mentioned.
“Something more reliant perhaps on the process and the individual would be the Jupiter Income fund which has a very raft history of being one of the better performing funds within the sector.
“That fund was taken on around about three or four years ago by Ben Whitmore and I would say Ben – a value manager – is definitely a manager that puts capital preservation first.”
While the five crown-rated fund’s top holding is BP, it also includes quality growth names such as Imperial Tobacco among its top 10 holdings.
The fund is another of the few to outperform in 2016, returning 2.81 percentage points ahead of the All Share and has beaten the index every year since Whitemore took charge.
Jupiter Income has an OCF of 0.94 per cent and currently yields 3.6 per cent.
Performance of funds vs IA UK Equity Income sector and FTSE All Share in 2016
Source: FE Analytics
The final diversifier to Threadneedle UK Equity Income Husselbee suggests is Chelverton UK Equity Income, run by David Horner and David Taylor.
“I think if you are looking for a fund that is different because it has moved outside of the larger-cap towards the mid- and smaller-cap arena to find income then I think the Chelverton UK Equity Income fund is another fund worth mentioning.
“It is run by David Taylor [and David Horner] who once again has a very strong reputation in running smaller companies and income funds.”
The smallest fund chosen with £464m in AuM, the portfolio is predominantly made up of smaller companies with only 29.1 per cent (or 23 stocks of 89) in companies with a market capitalisation of more than £1bn.
The fund struggled in 2016, returning 4.56 per cent though much of this was due to the impact of Brexit in June, when the fund lost more than 12 per cent over the course of a week.
The Chelverton UK Equity Income fund currently yields 4.23 per cent has an OCF of 0.92 per c