MI Chelverton UK Equity Income, JOHCM UK Equity Income and Royal London UK Equity Income are among some of the funds in the IA UK Equity Income sector that have achieved the highest capital gains over five years while also offering attractive dividend pay-outs, according to data from FE Analytics.
The debate as to how much emphasis an equity income fund manager should place on capital appreciation has been a hot topic of debate for a while.
In fact, given the FTSE All Share index’s dividend yield is derived from such a concentrated number of stocks, the Investment Association even reduced the minimum yield requirement for funds to remain in the sector earlier this year.
Does this mean that investors have to pick between income or growth with any UK equity fund they invest in, or are there vehicles that can deliver on both counts?
To find out, we looked at the funds within the IA UK Equity Income sector which, by proxy, have achieved a dividend yield of at least 100 per cent of that of the FTSE All Share’s over rolling three-year periods and have retained a dividend yield of at least 90 per cent of the index’s yield annually.
Out of 83 funds in the sector, nine have managed to beat the total return of the FTSE All Share over one, three and five years.
Incidentally, all of these funds would have paid an income of at least £2,000 based on an initial £10,000 investment – meaning an investor would have received 20 per cent of their original amount in dividend pay-outs alone – over five years. The funds, along with their total returns and income paid on a £10,000 investment over this time frame, are shown in the below table.
Source: FE Analytics
The only fund on the list to have paid out more than £3,000 in income alone over five years is MI Chelverton UK Equity Income, which has been headed up by David Horner and David Taylor since its launch in 2006.
The £477m fund aims to provide a progressive income stream as well as long-term capital growth, which it does through a diversified portfolio of predominantly small-cap and AIM stocks. Not only would an investor have earned £3,793.93 in income alone on a £10,000 investment over five years, it has comfortably outperformed the FTSE All Share over one, three and five years.
Its performance really comes into its own over longer-term time horizons though as, over five years, it has more than doubled the FTSE All Share index and outperformed its average peer by 58.77 percentage points with a total return of 127.92 per cent, making it the second-best individual performer in the sector over this time frame.
Given that it tends to invest in under-researched companies that are further down the cap spectrum, investors may not be surprised to hear that it has a bottom-quartile maximum drawdown – which measures the most money lost if bought and sold at the worst possible times – of 13.32 per cent over five years. It has a bottom-decile annualised volatility over the same time frame.
Next on the list for its five-year dividend pay-out of £2,865.89 on a £10,000 investment is JOHCM UK Equity Income, which has been run by co-managers James Lowen and Clive Beagles since its launch in 2004.
The fund has a relatively concentrated portfolio of 61 stocks and also aims to generate both capital growth and income growth. While it is significantly overweight small- and mid-caps relative to the benchmark, some of its largest individual weightings include the likes of Shell, BP, HSBC and Lloyds.
Over five years, the fund has returned 84 per cent compared to its sector average and benchmark’s respective returns of 69.15 and 58.34 per cent. It has done so with an even higher drawdown than the aforementioned Chelverton fund though at 16.26 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
While existing investors can indeed increase their weightings, the fund is currently soft-closed to new investors.
Next up is the four crown-rated Royal London UK Equity Income fund, which would have paid out £2,696.82 in income alone based on a £10,000 investment over the last five years.
Second only to Chelverton UK Equity Income, the £1.8bn fund has achieved some of the highest returns on the list, having outperformed the FTSE All Share and its sector average by 40.53 and 29.72 percentage points respectively over five years with a total return of 98.87 per cent.
Manager Martin Cholwill prioritises income over capital growth, although he aims for both. He does so through investing solely in high-yielding stocks which fund sustainable dividend payments through significant free cash-flow. Largest individual weightings within the 52-stock portfolio include Royal Dutch Shell, GlaxoSmithKline and AstraZeneca.
From a risk perspective, the fund is perhaps lower-octane than the previously-mentioned funds; this could be due to its comparatively larger weightings in UK blue-chips which stems from the prioritisation of income over growth. It has a second-quartile maximum drawdown of 9.17 per cent as well as a top-quartile annualised volatility and Sharpe ratio (which measures risk-adjusted returns) over five years.
The fourth fund on the list for its five-year income pay-out of £2,647.87 on an £10,000 investment is Jupiter Income Trust, which has five FE crowns and has been managed by Ben Whitmore since 2013.
The £2.33bn fund has a concentrated portfolio of 42 stocks which have been chosen with the aim of producing a high income that at least increases in-line with inflation. While it can invest across the cap spectrum, it has a 75.1 per cent allocation to large-caps and a further 18.2 per cent in mid-caps.
Not only has it provided investors with an attractive stream of income, it has returned 71.85 per cent over five years compared to the FTSE All Share’s return of 58.34 per cent and its average peer’s return of 69.15 per cent.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
When it comes to its risk metrics, it is in the third quartile for its maximum drawdown of 10.7 per cent and has a second-quartile annualised volatility and Sharpe ratio.
Threadneedle UK Equity Income is hot on its heels in terms of its five-year dividend pay-out on a £10,000 investment at £2,578.15.
Headed up by Richard Colwell since 2010, the fund aims to outperform the FTSE All Share by 2 to 3 per cent per annum over rolling three- to five-year periods as well as achieve a high and rising dividend.
It does so through opting for companies the manager deems to have strong long-term growth prospects, sufficient financial strength and which are able to convert earnings streams into cash-flows. It also looks for management teams that can allocate capital efficiently. Examples of its largest individual weightings include AstraZeneca, GlaxoSmithKline and Imperial Brands.
Over five years, the £3.7bn fund has outperformed its sector average and benchmark by 18.9 and 29.71 percentage points respectively with a total return of 88.05 per cent. It has done so with a top-quartile Sharpe ratio, a second-quartile annualised volatility and a second-quartile maximum drawdown of 9.02 per cent.
Other funds on the list which deserve an honourable mention are Man GLG UK Income, Franklin UK Equity Income, Rathbone Blue Chip Income and Growth and UBS UK Equity Income.