Seven of 49 funds in the IA UK Equity Income sector with long-enough track records have shown higher volatility but greater downside protection than the FTSE All Share over the last decade, according to data from FE Analytics.
Among the more volatile on the list are MI Chelverton UK Equity Income, JOHCM UK Equity Income and Unicorn UK Income.
This data comes as the third part of an FE Trustnet series that looks at funds’ Sortino ratios, which measure risk-adjusted returns with a focus on downside volatility. This means that a fund could be highly volatile but have a high Sortino ratio, meaning it has captured all the beneficial levels of volatility over a certain time frame.
Having looked at the IA UK All Companies and IA Global sectors previously, we now focus on the IA UK Equity Income sector, in a bid to find the funds that boast a track record of maximising returns while protecting on the downside.
Out of all funds in the sector with 10-year track records, seven have been more volatile than the FTSE All Share index but also have a higher Sortino ratio over this time frame.
Source: FE Analytics
As seen above, the fund with the highest Sortino ratio over the last 10 years at 0.42 is Unicorn UK Income, which is managed by Simon Moon and FE Alpha Manager Fraser Mackersie. The duo (pictured) took over full management of the fund in 2014, after the passing of former lead manager John McClure. 
While investors should take this into account, the managers have always been vocal about maintaining the same stock selection process and investment aims as McClure, having worked at Unicorn for several years before taking to the fund’s helm.
For instance, the managers choose predominantly small- and mid-caps focusing on bottom-up fundamentals, such as profitability, cash generation and low PE ratios.
Combined with qualitative factors such as meeting individual companies, this leaves them with a concentrated portfolio which currently stands at 45 stocks. Its largest individual holdings are BBA Aviation, Primary Health Properties and Secure Trust Bank.
Over 10 years, the fund has an annualised volatility of 14.95 per cent compared to the All Share’s volatility of 14.4 per cent, ranking it 41st out of 49 in the sector.
However, it has achieved a total return of 174.26 per cent over this time frame, compared to its sector average and benchmark’s respective returns of 73.11 and 81.25 per cent.
A majority of these returns were made at the start of the period as over one and three years it has fallen into the bottom quartile relative to its average peer. The fund’s preferred hunting grounds of small- and mid-caps have suffered recently as a result of the Brexit vote.
If an investor had placed £1,000 into the fund 10 years ago, they would have received £519.76 in income alone.
The fund with the second-highest Sortino ratio on the list at 0.3 is Schroder UK Alpha Income, which has been managed by Matt Hudson since 2005.
While the fund has a similarly concentrated portfolio at 47 holdings, it predominantly holds large-caps because of its natural bias towards companies that pay out above-average dividends. Its top three holdings are currently Royal Dutch Shell, BP and British American Tobacco.
In terms of stock selection process, Hudson adopts a business cycle-based approach, where he focuses on companies that will benefit depending on which stage of the economic cycle we are in.
This has stood him in good stead as, over the last 10 years, the £550m fund has outperformed its sector average and benchmark by 46.49 and 38.35 percentage points respectively with a total return of 119.6 per cent.
Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
While it has a higher annualised volatility than the FTSE All Share over this time frame, it has the lowest annualised volatility on the list at 14.27 per cent.
Had an investor placed £1,000 into the fund a decade ago, they would have received £471.01 in income.
In contrast, the fund with the highest annualised volatility on the list is MI Chelverton UK Equity Income at 16.3 per cent. However, this is likely to be because it focuses on companies further down the cap spectrum, which tend to be more volatile.
Managers David Horner and David Taylor have been at the helm of the £452m fund since its launch in 2006 and aim to provide capital growth and growing streams of income through a diversified portfolio of around 80 stocks, all of which are outside of the FTSE 100 index.
They will also hold AIM-listed stocks as well as fully-listed companies, and nine holdings currently have a market cap of less than £100m.
When choosing these stocks, Horner and Taylor adopt a bottom-up stock selection process which focuses on conventional cash flow, balance sheet analysis and ability to grow dividends. Its largest holdings include machinery hire firm Lavendon Group, Galliford Try and life insurance company Phoenix Group.
Over the last decade, the fund – which has a Sortino ratio of 0.21 - has returned 101.94 per cent compared to its average peer’s return of 73.11 per cent. A majority of its outperformance comes from rising markets as, during the bear markets of 2008 and 2011, it fell into the bottom quartile with hefty losses relative to its sector average.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
In terms of income alone, an investor would have received £593.26 on an initial £1,000 investment 10 years ago.
Hot on its heels with an annualised volatility of 15.73 per cent over the last decade is JOHCM UK Equity Income, which also has a similar Sortino ratio of 0.29.
The £2.9bn fund is managed by Clive Beagles and James Lowen, who also look further down the cap spectrum in a bid to fulfil their strict dividend yield discipline, which leads to a contrarian investing style and a portfolio of higher-yielding stocks.
However, it must be noted the fund is now soft-closed in a bid to manage capacity so is unavailable to new investors.
Other funds on the list that deserve an honourable mention are Santander Equity Income, Insight Equity Income and, with a more income-focused mandate and a process that uses derivatives, Schroder Income Maximiser.