The compounding effect of re-investing dividends is said to benefit equity income funds over the long-term, but those focused purely on growth have come out well on top since the early 2000s.
Invesco Perp High Income and Invesco Perp Income, which are headed up by FE Alpha Manager Neil Woodford, are the only UK Equity Income funds that make the top-20 list, taking third and 14th spot, respectively.
UK mid cap funds dominate the top-10, with Franklin UK Mid Cap and Old Mutual UK Mid Cap topping the list overall. However, there were a number of larger cap focused funds in the mix, including the likes of Nigel Thomas’s AXA Framlington UK Select Opportunities fund, and Julie Dean’s Cazenove UK Opportunities fund.
Top-20 best-performing UK equity funds over 10yrs
| Name | 10yr |
|---|---|
| Franklin UK Mid Cap | 386.83 |
| Old Mutual UK Mid Cap | 335.31 |
| Invesco Perp High Income | 256.2 |
| Schroder Recovery | 244.65 |
| AXA Framlington UK Select Opportunities | 239.8 |
| Cazenove UK Opportunities | 237.76 |
| Majedie UK Equity | 232.02 |
| Allianz UK Mid Cap | 229.9 |
| Invesco Perp UK Aggressive | 224.09 |
| HSBC FTSE 250 Index |
222.89 |
| Stan Life Inv UK Equity High Alpha | 216.39 |
| Marlborough UK Leading Companies | 215.07 |
| Schroder UK Mid 250 | 211.43 |
| Invesco Perp Income | 211.23 |
| BlackRock UK Special Situations | 209.71 |
| Fidelity Special Situations | 207.93 |
| SVM - UK Opportunities | 205.48 |
| Schroder - UK Alpha Plus | 199.41 |
| Jupiter - UK Growth | 196.46 |
| Aberdeen - UK Mid Cap | 190.25 |
Source: FE Analytics
The study did not include funds that sit in the IMA UK Smaller Companies sector.
Special sits and recovery funds – such as Fidelity Special Situations, BlackRock UK Special Situations and Schroder Recovery – also fared very well. These vehicles are contrarian in nature and prioritise valuations over everything else, which Schroders' Kevin Murphy explained in more detail in a recent FE Trustnet article.
Growth funds continue to dominate the performance tables throughout the top-quartile of UK equity funds. Only nine of the top-50 funds sit in the UK Equity Income sector.
It should be noted that the UK All Companies sector is larger than the UK Equity Income sector, with 283 vehicles compared with 101.
However, UK All Companies funds are still overrepresented in the top-10, top-20 and top-50. Moreover, the average UK growth fund beats the average UK equity income fund over the period – albeit only just.
Performance of sectors over 10yrs
Source: FE Analytics
As well as dominating the total return tables, UK All Companies funds come out on top on a risk-adjusted return basis as well. In other words, the amount of volatility they have taken on has been worth the excess return.
Risk-adjusted return is measured by the Sharpe ratio, which measures a fund's return relative to a notional risk-free investment – in this case, cash. The difference in returns is then divided by the fund's volatility.
Four equity income funds made it in to the top-20, and 11 made it in to the top-50. The four funds that made it in to the top-10 – Invesco Perpetual Income, Invesco Perpetual High Income, SJP UK High Income and Invesco Perp UK Strategic Income – are all headed up by either Woodford or his colleague Mark Barnett.
Top-20 best UK equity funds for risk-adjusted returns over 10yrs
| Name | Sharpe ratio |
|---|---|
| Franklin UK Mid Cap | 0.73 |
| Invesco Perp High Income | 0.72 |
| Old Mutual UK Mid Cap | 0.67 |
| Invesco Perp Income | 0.64 |
| AXA Framlington UK Select Opportunities | 0.6 |
| Majedie UK Equity | 0.58 |
| Invesco Perp UK Strategic Income | 0.58 |
| Cazenove UK Opportunities | 0.58 |
| Schroder Recovery | 0.54 |
| Invesco Perp UK Aggressive | 0.53 |
| SJP UK High Income |
0.53 |
| Jupiter UK Special Situations | 0.51 |
| Newton UK Opportunities | 0.5 |
| Fidelity Special Situations | 0.5 |
| Marlborough UK Leading Companies |
0.5 |
| Unicorn Free Spirit | 0.49 |
| BlackRock UK Special Situations | 0.49 |
| Ecclesiastical UK Equity Growth | 0.49 |
| Allianz UK Mid Cap | 0.49 |
| Kames Ethical Equity | 0.49 |
Source: FE Analytics
Franklin UK Mid Cap retains its number-one spot even though it has been significantly more volatile than its sector average, though Invesco Perpetual High Income climbed into second at the expense of Old Mutual UK Mid Cap.
Ben Willis, head of research at Whitechurch, says that growth funds’ ability to increase and decrease their exposure to small and mid caps has been one of the principal reasons for their dominance over the long-term.
"A lot of the growth funds have high allocations to the mid and small cap markets, which have had a very good time of it," he said.
"Last year they had a great run, and though they suffered in 2008, they had a very good 2009 and 2010. Small and mid caps also flew during the credit bubble."
"Smaller companies have stronger earnings growth. When they reach maturity, they tend to start distributing dividends rather than reinvesting their profits, making it harder to grow. It’s these businesses that equity income funds tend to go for."
Willis says there are merits of holding both equity income and growth funds in a portfolio.
"Diversification is the key here – if you only held a UK Equity Income fund in 2011 then you would have done very well, but in 2012 you would have been better off in growth. However, if you’d been in both, you would have covered both angles."
"It does come down to your objective, though. If you’re investing purely for income then there’s not a lot of point investing in a mid cap growth fund. However, if you’re investing for growth [and you’re reinvesting your dividends], then there is a case for equity income."
Willis points to a multi-cap equity income fund as the sweet-spot, and thinks it would complement a larger cap equity income portfolio such as Invesco Perpetual High Income.
"It’s difficult for traditional equity income funds to attract assets when you’ve got people like Woodford and Adrian Frost, who have a phenomenal track record," he said.
"However, I think a multi-cap fund – which has greater flexibility to move in and out of sectors and greater growth potential – is worth holding alongside one of these more defensive portfolios."
None of the most popular multi-cap income funds have a 10-year track record yet, but some have started very strongly indeed.
FE Alpha Manager John McClure’s Unicorn UK Income fund is arguably the standout performer. It has returned a stellar 192.46 per cent since its launch in 2004, beating the IMA UK Equity Income sector average by more than 100 percentage points.
McClure invests predominantly in small caps, but does have some mid cap exposure.
In the last three years, Giles Hargreave’s Marlborough Multi Cap Income fund and Gervais Williams’ Miton UK Multi Cap Income funds have been launched in to the market. Both have had a very good start.
Performance of funds vs sector over 1yr
Source: FE Analytics
Willis says Miton UK Multi Cap Income is his favoured choice.
"Gervais Williams has proven expertise in mid and small cap investing," he said. "It’s important to know that the fund you’re invested in has been run by someone with a lot of experience in the field."
Miton UK Multi Cap Income requires a minimum investment of £1,000 and has an ongoing charges figure (OCF) of 1.77 per cent. It is currently yielding 4.46 per cent.
