CF Miton UK Multi Cap Income, MFM Slater Income and Unicorn UK Income are among some of the funds in the IA UK Equity Income sector that have bounced back from the bottom quartile last year to achieve top-quartile returns year-to-date.
This comes as the second part of a series, which focuses on the funds with strong long-term track records that shouldn’t be shunned for their lacklustre performances throughout 2016.
Last year’s sudden growth/value rotation, combined with unforeseen geopolitical events and a plummet in sterling, caught many UK equity investors off-guard.
In fact, out of 390 UK equity funds in the Investment Association universe, only 54 – or 13.8 per cent – managed to outperform the FTSE All Share index in 2016. It also meant that many funds with poor long-term track records achieved a rapid boost to their short-term returns.
In this article, we have focused our attention on the funds in the IA UK Equity Income sector which have bounced back from bottom-quartile returns last year into the top quartile in 2017 so far.
Out of 86 funds in the sector, there are nine funds that fall into this category, which are listed in the below table.
Source: FE Analytics
One commonality between several of these funds that stands out is a bias towards companies further down the cap spectrum. As discussed in the previous article in the series, their leap from the bottom of the pack to the top could be the result of less Brexit-related uncertainty, given that Article 50 has now been triggered and EU exit negotiations are underway. This could mean that investors’ initial fears around holding too much domestic exposure through mid and small-caps are reversing.
One such fund, which is in fact the top-performer within the entire IA UK Equity Income sector year-to-date, is FE Alpha Manager Fraser Mackersie and Simon Moon’s Unicorn UK Income fund.
The £625m fund aims to provide a high and rising income through a concentrated portfolio of stocks, which currently stands at 44 holdings. These are chosen for their robust business models and strong balance sheets, with the view of holding them over the long term.
Their quantitative and qualitative analysis gives them a natural bias towards mid- and small-caps, with its largest individual holdings currently including the likes of BBA Aviation, Primary Health Properties and employment agency FDM Group.
While the fund only made 0.47 per cent in 2016, it has returned 13.19 per cent year-to-date, comfortably doubling the return of its average peer. Over five years, the fund has achieved a top-decile return of 113.02 per cent, compared to its FTSE All Share benchmark and sector average’s respective returns of 60.29 and 70.78 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
Had an investor placed £10,000 into the fund five years ago, they would have received £2,828.68 in income alone.
Another fund with a notable bias to mid- and small-caps relative to the benchmark which has also bounced back this year is CF Miton UK Multi Cap Income.
The five crown-rated fund, which is managed by FE Alpha Manager Martin Turner and Gervais Williams, returned 3.14 per cent last year but has returned 8.24 per cent in 2017 so far.
Turner and Williams are unrestricted in terms of the size of the companies they can invest in; almost one-third of the fund is invested in FTSE AIM constituents and a further 16 per cent is held in FTSE Small Cap stocks.
The managers aim to achieve both income and growth through a diversified portfolio of under-researched companies that have been incorrectly priced by the market. Its largest holdings include the likes of Stobart Group, greeting cards company IG Design Group and IPTV (Internet Protocol Television) company Amino Technologies.
Over the last five years, the £829m fund has outperformed its average peer by 59.39 percentage points with a total return of 130.12 per cent. Based on an initial £10,000 investment, investors would have received £3,088.40 in income over the same time frame.
Similarly, FE Alpha Manager Siddarth Chand Lall’s Marlborough Multi Cap Income fund is one of the top-five performers in the IA UK Equity Income sector over five years, having returned 104.11 per cent.
Last year, however, the £1.5bn fund was the second-worst performer in the sector, having lost 3.21 per cent. Year-to-date, it has returned 9.52 per cent compared to its average peer’s return of 5.65 per cent.
Like Williams and Turner, Lall has a highly-diversified portfolio of 140 stocks, a majority of which he deems to be under-researched by the broader market and therefore lie further down the cap spectrum.
The manager does not adopt one set style bias and focuses greater attention on generating income than he does delivering capital gains.
“Given it is an income fund rather than a growth fund or a total return fund, we really focus constantly on that,” Lall told FE Trustnet at the start of the year. “That’s not to say that we’re going to purposefully sacrifice capital as we are totally mindful that capital growth is important.
“There will be years where it’s not as impressive but, generally speaking, we try and do both.”
Marlborough Multi Cap Income would have earned investors £3,204.31 in income on a £10,000 investment over the last five years.
Other funds that were bottom-quartile performers last year and are in the top quartile year-to-date, which also have a small – and mid-cap bias, include MI Chelverton UK Equity Income and TB Saracen UK Income.
Overall though, the fund on the list to have achieved the highest return year-to-date after Unicorn UK Income is FE Alpha Manager Henry Dixon’s £144m Man GLG UK Income fund, which does have a small- and mid-cap overweight relative to the FTSE All Share.
While the fund returned 5.6 per cent last year, it is up 12.75 per cent year-to-date. Over five years, it has outperformed its average peer and benchmark by 11.51 and 22.32 percentage points respectively with a total return of 82.42 per cent. It would have also paid out £2,580.82 in income on a £10,000 investment over the same time frame.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
The fund adopts the existing value-focused investment process that Dixon uses for his Man GLG Undervalued Assets portfolio, combined with a blend of stocks with strong balance sheets where dividend growth is likely to double that of the market average. Its largest individual holdings include British American Tobacco, Rio Tinto and Lloyds Banking Group.
Other funds to have made it onto the ‘bounce back’ list include MFM Slater Income, Standard Life Investments UK Equity Income Unconstrained and Santander Enhanced Income Portfolio.