One of the smallest members of the IA UK Equity Income sector paid out more income than its peers in 2018, FE Trustnet research shows, while a passive offering outperformed most active funds.
In an article earlier this week, we looked at the entire Investment Association universe to find out which funds had generated the highest income payouts for their investors over the course of the past year. Templeton Emerging Markets Bond, L&G Dynamic Bond and UBS Global Enhanced Equity Income came out on top in this research.
Here we turn to UK equity funds and their income payouts, concentrating on the IA UK Equity Income sector (as would be expected) but also looking at the IA UK All Companies and IA UK Smaller Companies peer groups.
The highest payouts of 2018 came from ‘enhanced income’ funds, which use covered calls used to boost to boost their income streams and tend to outperform their conventional peers on this front.
Schroder Income Maximiser, for example, paid out £757.30 on a £10,000 investment made at the start of the year, followed by Insight Equity Income Booster (£749.78) and Premier Optimum Income (£672.18).
Price performance and total return of fund in 2018
Source: FE Analytics
If we just look at those funds that do not enhance their income streams, however, then the IA UK Equity Income fund with the highest payout last year was Santander Dividend Income Portfolio. It paid out £579.61 on an initial £10,000 investment and has a historic yield of 5.76 per cent.
The fund, which is managed by Graham Ashby and Duncan Green, is just £2.7m in size. This makes it the fifth smallest fund in the peer group.
As the chart above shows, the fund lost 15.72 per cent in capital terms last year but its high income payout meant that the total return was eased to an 11.09 per cent; however this was still a third quartile result for the fund.
Santander Dividend Income Portfolio counts typical dividend stocks such as Royal Dutch Shell, British American Tobacco and GlaxoSmithKline among its top 10 holdings. However, it does have some non-UK names among with portfolio with 3.84 per cent of assets in Norwegian stocks, 2.11 per cent in Swiss names and 1.05 per cent in Irish companies.
The fund in second place – Liontrust Macro Equity Income – is a larger member of the sector as it has assets under management of £120.2m. It paid out £507.91 on an initial £10,000 and has a historic yield of 5.5 per cent.
The process used by managers Stephen Bailey and Jamie Clark is based on the analysis of economic, political, social and cultural developments to identify macro-themes. They then look for the dividend-paying companies that are best-placed to capitalise on these themes.
Liontrust Macro Equity Income’s largest sector allocation is to financials at 33.8 per cent, followed by basic materials (19.2 per cent) and telecommunications (12.3 per cent). GlaxoSmithKline, Anglo Pacific Group and Vodafone are its three biggest holdings.
Source: FE Analytics
Majedie UK Income came in third with its £502.81 distribution and 5.48 per cent historic yield. Mark Wharrier was appointed lead manager on the £717m fund (working alongside Yuri Khodjamirian, who has been in place since 2013) in November last year.
Explaining the process used on the portfolio, he said: “Identifying companies with improving free cash flow, by which I mean the ongoing cash flow available to shareholders, is at the heart of our approach.
“The evolution of this cash flow drives both equity value over time and long-term sustainable dividend growth. We seek companies where the stock market price does not reflect the medium-term cash flow potential of the business.”
Vanguard FTSE UK Equity Income Index appears fourth on the list with its £487.79 payout and 5.1 per cent historic yield. This is a passive fund (it tracks a basket of UK dividend-payers) that has ranked higher than the majority of its active peers.
That said, the fund was in the IA UK Equity Income sector’s third quartile for total returns in 2018 after falling 11.26 per cent. Over the past five years, the tracker has made a 17.79 per cent return, putting it in the bottom quartile over this time frame.
Price performance and total return of fund in 2018
Source: FE Analytics
In the IA UK All Companies sector (which isn’t the typical home of income-focused funds), the highest payout last year came from 7IM UK Equity Value. It distributed £462.75 on an initial £10,000 investment and has a 4.9 per cent historic yield.
Of course, this peer group is now home to some notable former members of the IA UK Equity Income sector, who were forced out after failing to meet its yield target.
Mark Barnett’s Invesco Income fund paid out £334.35 on an initial £10,000, which gives it 130th highest payout from a UK equity strategy. Invesco High Income paid out £319.57, which was in 136th place.
Neil Woodford’s LF Woodford Equity Income fund, meanwhile, came in 153rd on the ranking after distributing £300.74 in 2018.
When it comes to the IA UK Smaller Companies sector, income payouts are expected to be lower. The best result from this peer group was from Aberforth UK Small Companies, with its £272.98 payout from the initial £10,000.