Royal London UK Equity Income, Trojan Income and AXA Framlington Monthly Income are examples of IA UK Equity Income funds that have posted some of the best return and risk numbers over recent years, a study by FE Trustnet shows. 
Last year, we ran a series of articles looking at funds’ decile rankings when it comes to cumulative five-year returns, those for the three most recent individual calendar years, annualised volatility, maximum drawdown, alpha generation, Sharpe ratio, downside capture and upside capture.
When we covered the IA UK Equity Income sector, the likes of Evenlode Income, MI Chelverton UK Equity Income and Threadneedle UK Monthly Income topped the table but in the new edition of the research we have five different funds at the head of the rankings.
Over the following pages, we take a closer look at the five IA UK Equity Income funds leading the sector on the average decile ranking for the 10 metrics as well as revealing the top 25 in a table on the final page.
AXA Framlington Monthly Income
Performance of fund between 1 Jan 2012 and 31 Dec 2016
Source: FE Analytics
With an average decile ranking of 3.1 and an 82.24 per cent over the five years in question, George Luckraft’s five FE Crown-rated AXA Framlington Monthly Income fund holds fifth place in this research. The £243.6m fund has achieved top-decile numbers when it comes to alpha generation, annualised volatility, maximum drawdown, Sharpe ratio and downside capture. It is, however, in the bottom decile when it comes to upside capture. Luckraft’s top holding is Royal Dutch Shell, followed by British American Tobacco and BP but the portfolio on has 34.53 per cent in the FTSE 100; there’s another 18.54 [per cent in small-caps and 27.17 per cent in AIM-listed companies. This is in keeping with Luckraft’s aim of building a diversified portfolio that looks very different to the FTSE All Share and dividend-paying stalwarts dominate the UK income market. AXA Framlington Monthly Income has a clean ongoing charges figure (OCF) of 0.84 per cent and is yielding 4.51 per cent.
Threadneedle UK Equity Income
Performance of fund between 1 Jan 2012 and 31 Dec 2016
Source: FE Analytics
Next up we have the £3.8bn Threadneedle UK Equity Income fund, which is managed by head of UK equities Richard Colwell and also has a 3.1 average decile ranking. The five crown-rated fund made 90.59 per cent in the five years to the end of 2016, putting it in the IA UK Equity Income sector’s second decile. It hasn’t produced top-decile numbers in any of the 10 categories, but is second decile in six of them and is only worse than fifth decile in one. Colwell focuses on companies that are under-valued or overlooked by other investors, which means the portfolio can look different from its peers. That said, the top holdings do include typical equity income names such as GlaxoSmithKline, AstraZeneca and Imperial Brands. The FE Invest team said: “Colwell’s approach to equity income investing is unusual, and differentiates this fund from peers. This is a useful feature in a sector with many similar strategies. His focus on medium- to long-term dividend growth in areas overlooked by the market has paid off, generating the required level of income with a capital growth kicker alongside. However, investors must be aware that this contrarian style of investing often involves buying more of poorly performing companies, providing the managers’ investment case still holds; therefore, some of the fund’s holdings can often be suffering uncomfortably negative news flows.” Threadneedle UK Equity Income has a 0.82 per cent OCF and yields 3.80 per cent.
CF Miton UK Multi Cap Income
Performance of fund between 1 Jan 2012 and 31 Dec 2016
Source: FE Analytics
The fund in third place also has an average decile ranking of 3.1 but has made a higher total return than the previous two funds. CF Miton UK Multi Cap Income, which is managed by Gervais Williams and FE Alpha Manager Martin Turner, made a 130.16 per cent total return between 1 January 2012 and 31 December 2016 and sits in the peer group’s top decile for five-year returns, alpha generation, annualised volatility and Sharpe ratio. The managers’ area of expertise is in smaller companies and this is reflected in the portfolio: only 17 per cent is in the FTSE 100. Some 32.7 per cent is in AIM names. 13.7 per cent is in the FTSE Small Cap and 19.7 per cent is in the FTSE 250, with names such as Stobart Group, IG Design Group and Amino Technologies appearing in the fund’s top 10. Another of the fund’s differentiating features is the use of derivative options to limit the risk of falling UK equity markets, which has helped it to be less risky than the market over the long run. CF Miton UK Multi Cap Income has a clean OCF of 0.81 per cent and is yielding 3.97 per cent.
Trojan Income
Performance of fund between 1 Jan 2012 and 31 Dec 2016
Source: FE Analytics
FE Alpha Manager Francis Brooke’s £3.3bn Trojan Income fund comes in second place with an average decile ranking of 2.9 and a five-year total return of 77.11 per cent. The five FE Crown-rated fund has achieved a first decile result for annualised volatility and maximum drawdown while being in the second decile for alpha generation, Sharpe ratio and downside capture. Brooke focuses on companies that have the potential to increase the level of income paid out to shareholders but he is also known for paying close attention to capital preservation. This leads him to predictable businesses that generate substantial levels of cash, with his top holdings being the likes of Unilever, Royal Dutch Shell and GlaxoSmithKline. Square Mile said: “The managers view risk as the potential for permanent capital loss and rightly take pride in this strategy's capacity to provide protection in more volatile periods. In the same vein it does therefore have the propensity to lag the market in more aggressive upswings. However, the consistency of returns and protection in down markets should compound into a rewarding investment for investors over time.” Trojan Income has a 1.02 per cent OCF and yields 3.66 per cent.
Royal London UK Equity Income
Performance of fund between 1 Jan 2012 and 31 Dec 2016
Source: FE Analytics
In first place with a 2.9 average decile ranking and a 104.11 per cent total return is Martin Cholwill’s £1.8bn Royal London UK Equity Income fund. It’s top quartile for five-year returns, Sharpe ratio and upside capture. Cholwill tends to hold more mid-cap companies than the typical UK equity income manager although FTSE 100 names like Royal Dutch Shell, GlaxoSmithKline and HSBC top the portfolio at the moment. The manager prefers businesses that have high levels of cash on their balance sheets, as this reflects their ability to pay out dividends. The FE Invest team said: “The fund may benefit from being heavily invested in medium-sized companies, as the larger dividend-payers have been very popular in recent years and their share prices have increased to the point where some commentators say they look overvalued. Medium-sized dividend payers have been relatively overlooked as they are regarded as less defensive. Nevertheless, it would be wrong to see the fund as a medium-sized focused fund, as Martin Cholwill invest with little consideration to the market capitalisation.” Royal London UK Equity Income has a clean OCF of 0.68 per cent and is yielding 3.97 per cent.
Source: FE Analytics