While funds in the IMA UK All Companies sector may not have high headline yields, many have still managed to deliver a decent level of income to investors because their net distributions have been high on an absolute basis.
FE Research’s Rob Gleeson explained this in a recent FE Trustnet interview.
"The headline yield is important on the day you buy it; however, if the published yield has dropped, that can mean that you are just receiving the same amount of income from a bigger pot," he explained.
"The interesting point about yield is that growth funds can be very good for income investors. They may have a low headline yield of 1 per cent; however, if they are growing that by 10 per cent each year, investors will be seeing a good level of income. I think there is a little too much obsession over yields."
FE Trustnet research vindicates this view. Our data shows that a number of highly rated UK All Companies funds that have excelled in the capital growth stakes have also delivered a competitive level of income.
Income earned on funds over 10yrs from £1,000 lump sum
Source: FE Analytics
Someone who invested £1,000 in to the likes of Fidelity Moneybuilder Growth 10 years ago would have received £451.20 in the way of dividends by now. If they had gone for Alastair Mundy’s four crown-rated Investec UK Special Situations portfolio, they would have received £422.51, while FE Alpha Manager Jan Luthman’s Liontrust Macro UK Growth fund has returned a whopping £594.23 in the way of dividends.
Income earned on funds over 10yrs from £1,000 lump sum
| Name | Income earned (£) |
|---|---|
| Liontrust Macro UK Growth | 594.23 |
| Franklin UK Blue Chip | 574.89 |
| Threadneedle Growth & Income | 516.87 |
| Standard Life UK Equity High Alpha | 511.91 |
| Old Mutual Equity | 496.43 |
| Cazenove UK Growth & Income | 487.12 |
| Majedie UK Equity | 473.29 |
| Fidelity Moneybuilder Growth | 451.20 |
| Jupiter Growth & Income | 447.10 |
| Investec UK Special Situations | 422.51 |
| Schroder Recovery | 387.67 |
| Old Mutual UK alpha | 364.70 |
| Jupiter UK Special Situations | 311.25 |
Source: FE Analytics
Among the other UK All Companies funds that have fared well in the income stakes are Majedie UK Equity, Jupiter Growth & Income – which, despite the name, does not have an official income target – and the Standard Life UK Equity High Alpha fund.
The Old Mutual UK Alpha fund, which star manager Richard Buxton has recently taken charge of, also appears relatively high up on the list.
Only two of the funds in the table above – Cazenove UK Growth & Income and Threadneedle Growth & Income – are currently yielding more than 3 per cent, illustrating the importance of looking beyond a headline yield when it comes to building an income portfolio.
Schroder Recovery is the lowest yielder on the list, at 1.41 per cent.
The dividends paid out by these growth funds are greater than many of those in the UK Equity Income sector, which have a specific income target relative to the FTSE All Share.
Of the 54 funds with a 10-year track record, 23 have paid out less in the way of dividends over the last decade than Luthman’s Liontrust Macro UK Growth portfolio. These include the likes of Jupiter Income and Halifax UK Equity Income, which both have more than £1bn in assets under management (AUM), as well as the Liontrust Income and Henderson UK Equity Income funds.
Of the 13 funds featured on the list, nine of them are top quartile in their sector over three and 10 years on a total return basis, while eight are top quartile over five years.
Over the decade, only the two Old Mutual funds and the Cazenove UK Growth & Income funds have failed to beat the FTSE All Share.
Performance of funds vs sector and index over 10yrs
| Name | 1yr returns (%) |
3yr returns (%) | 5yr returns (%) | 10yr returns (%) |
|---|---|---|---|---|
| Schroder - Recovery | 51.25 | 65.76 | 113.66 | 248.96 |
| Majedie - UK Equity | 32.22 | 59.78 | 79.54 | 246.61 |
| Stan Life Inv - UK Equity High Alpha | 39.84 | 66.54 | 103.75 | 226.52 |
| Jupiter - UK Special Situations | 28.92 | 60.69 | 77.37 | 193.04 |
| Liontrust - Macro UK Growth |
17.03 | 35.32 | 42.71 | 190.62 |
| Investec - UK Special Situations | 28.36 | 53.83 | 95.31 | 184.05 |
| Jupiter - Growth & Income | 29.85 | 61.56 | 79.91 | 181.59 |
| Threadneedle - UK Growth & Income |
29.12 | 61.41 | 64.24 | 177.66 |
| Fidelity - Moneybuilder Growth | 33.42 | 47.07 | 47.56 | 167.48 |
| Franklin - UK Blue Chip | 20.59 | 47.12 | 49.71 | 157.09 |
| Old Mutual - Equity | 29.65 | 55.86 | 67.84 | 119.39 |
| Cazenove - UK Growth & Income | 26.18 | 39.9 | 45.41 | 115.67 |
| Old Mutual - UK alpha | 38.8 | 59.38 | 46.85 | 110.55 |
| FTSE All Share | 22.59 | 44.39 | 48.4 | 145.36 |
| IMA UK All Companies | 25.76 | 46.44 | 48.91 | 134.18 |
Source: FE Analytics
The decent level of income has of course contributed to their outperformance on a total return basis, but most have also managed to outperform on a capital growth basis as well.
All of the funds have beaten the FTSE All Share over 10 years using this measure, but the two standout performers are the Schroder Recovery and Majedie UK Equity funds, as the graph below shows.
Capital growth performance of funds and index over 10yrs
Source: FE Analytics
Ben Willis (pictured), head of research at Whitechurch, thinks there is a case for investors to look to the UK All Companies sector for their equity income exposure, but only for those who prioritise total return.
"These funds all have a focus on income, but don’t have to stick to a yield criteria," he explained. "Something like Investec UK Special Sits is deeply contrarian and deep value, meaning that it picks up battered stocks that are often high yielding. Mundy doesn’t have to yield anything, but it’s a natural result of his process." "If total return is your remit, then something that is style-agnostic without any limitations is attractive, because it’s going to change its focus depending on where the opportunities are."
"However, if your primary concern is income, then you’d probably want to stay focused on the UK Equity Income sector. At certain times [the funds featured in the study] might not yield anything at all, but other times they might yield a lot. If you want a regular stream of income, this doesn’t really suit your requirements."
Another interesting theme that came from the study is the decent level of income paid out by tracker funds in the sector. Six UK equity index trackers, including F&C FTSE All Share Tracker and HSBC FTSE All Share Index, have returned more than £400 over the past 10 years.
Perhaps the most surprising result is the high level of income paid out by the sole UK mid cap tracker with a 10-year track record – the HSBC FTSE 250 Index fund – which has delivered £433 in the way of dividends. This is higher than a handful of funds in the UK Equity Income sector.
In an upcoming article, FE Trustnet will look at which UK Equity Income funds have failed to pay out as much income as a tracker in recent years.
