Royal London UK Equity Income is the most consistent IA UK Equity Income fund of the past decade, according to data from FE Analytics, beating the sector average in nine of the past 10 calendar years.
Of the 58 funds in the sector with a track record long enough to be included in the study, another nine funds beat the sector in seven of the past 10 calendar years.
Performance of funds vs sector
Source: FE Analytics
Martin Cholwill (pictured), who runs the Royal London UK Equity Income fund, aims to identify good companies with strong business models and sound finances that are able to deliver sustainable dividend growth
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The manager prefers companies with robust balance sheets yet whose shares are sufficiently out of favour so that they can be purchased on a dividend yield premium.
He focuses on those firms with attractive cashflow characteristics as he said it is more difficult for them to manipulate these figures than other types of earnings data.
Analysts at Square Mile Investment Consulting & Research said Cholwill’s experience, honed across a number of investment cycles, is one of the fund’s biggest assets and described his focus on cashflow and the sustainability of dividends as “wholly pragmatic” given the aim of steadily increasing payouts.
“This fund is a solid proposition with the flexibility to invest across the UK stock market and one that benefits from an experienced manager and sensible approach,” they noted.
Meanwhile, FE Invest’s analysts warned that Royal London UK Equity Income’s high exposure to medium-sized companies means its share price can fluctuate more wildly than its peers, but said Cholwill generates good extra returns relative to the extra risks he takes.
“The fund has benefited from avoiding certain parts of the market that have suffered in recent years, most notably the mining industry,” they said. “Stock selection has also been a constant contributor to performance. Aside from 2016, the dividend payment has tended to increase every year since 2012.”
Royal London UK Equity Income is yielding 4.53 per cent; someone who invested £10,000 in this fund at the start of 2009 would have received £6,953.13 in income alone since then.
Cholwill recently said that while a Brexit deal has been agreed between the UK and the EU, domestic opposition to the agreement means there are many possible outcomes and so he has not tried to position the fund for any one in particular.
“Markets hate uncertainty and we could well see further bouts of volatility, driven by Brexit worries and fears over trade wars,” he added. “The fund is underpinned by cautious economic growth assumptions and its focus on strong market positions, cashflow-backed dividends and robust balance sheets should provide resilience in a whole range of possible economic outcomes.”
Royal London noted that Cholwill is currently undergoing medical treatment. While the fund continues to be run in the same way under the lead manager, Richard Marwood has taken charge of face-to-face activities, supported by Niko de Walden. Cholwill is expected to return this year.
Data from FE Analytics shows that Royal London UK Equity Income has made 204.34 per cent over the 10-year period in question, compared with 138.35 per cent from its FTSE All Share benchmark and 131.72 per cent from its sector.
The £1.85bn fund has ongoing charges of 0.67 per cent.
Of the funds that beat the sector average in seven of the past 10 years, Standard Life Investments UK Equity Income Unconstrained was the only one that made more than Royal London UK Equity Income from a total return point of view over this time, with gains of 220.86 per cent.
Performance of funds vs sector and index over 10yrs
Source: FE Analytics
Just like Cholwill, manager Thomas Moore focuses more on stocks further down the market-cap spectrum. He looks solely at dividends when analysing companies, estimating future cash generation and comparing his own forecasts with those of the market.
FE Invest analysts said that what differentiates him from other equity managers is his emphasis on valuation and identifying companies with the capacity to change.
“Investors must be aware of the large domestic bet on financials and the UK consumer that Moore is currently positioned for,” they added. “[But] being supported by the Aberdeen Standard Life UK team, and combining this with Moore’s experience and approach to investing, should help to maintain a high level of income in the fund, and as a bonus, also provide investors with some capital appreciation.”
The £1.37bn Standard Life Investments UK Equity Income Unconstrained fund has ongoing charges of 1.15 per cent. It is yielding 4.28 per cent; someone who invested £10,000 in this fund at the start of 2009 would have received £7,385.83 in income alone since then.
There is technically a more consistent fund in the sector than Royal London UK Equity Income, but not in a way its managers should be proud of: HC Kleinwort Hambros Equity Income has made less than the sector average in every single one of the past 10 calendar years, with a total return over this time of 84.21 per cent.
Performance of fund vs sector
Source: FE Analytics
The £53.2m multi-manager fund has not been helped by an ongoing charges figure (OCF) of 2.44 per cent.