Our data shows that an equally weighted portfolio of the top funds for income generation over the last seven years has delivered a total return of 52.11 per cent, beating an equally weighted portfolio of the worst funds for income generation by a hefty 33.67 percentage points. Total return includes the effect of capital growth and reinvested dividends.
Performance of composite portfolios vs sector over 7yrs
Source: FE Analytics
The funds that have delivered the most amount of income have also been less volatile than both the sector average and the portfolio of the lowest income funds over that time.
For the purposes of the study, we looked over a seven year period to incorporate a full market cycle as that time frame includes both the crash years of 2007 and 2008 and the subsequent recovery.
Industry experts usually say that investors should focus on a growing source of income instead of simply chasing yield and the result of our research seem to demonstrate this.
According to FE Analytics, out of the top 16 funds for income generation over the last seven years, only three have underperformed against the sector on a total return basis, one of which is Newton Higher Income.
While investors who bought £1,000 of units in the fund seven years ago would have earned £345.48 worth of income – the third highest amount in the sector – it has been a third quartile performer over that time.
However, Schroder Income Maximiser, Trojan Income, JOHCM UK Equity Income and Threadneedle UK Equity Alpha Income are among the top five funds for income generation over seven years and all boast top quartile returns as well.
Source: FE Analytics
In addition, Unicorn Income, Schroder Income and Liontrust Macro Equity Income have also all been top quartile for their returns and their income generation over seven years.
On the other hand, only one of the 16 funds in the portfolio of the worst funds for income generation has outperformed the sector over that time.
For example, AXA Framlington UK Equity Income, SWIP UK Income, Henderson UK Strategic Income and Scot Wid UK Equity Income have all delivered bottom quartile income and returns over seven years. The one exception, however, is Montanaro Equity Income.
The portfolio, which focuses on small-caps, has delivered the third highest return in the sector over seven years, but investors who bought £1,000 in the fund seven years ago would have only received £201.87, which is the second lowest in the sector.
Montanaro Equity Income was only recently added to the IMA sector.
The study deliberately avoided looking over five years as that effectively incorporates the bottom of the market after the financial crash in 2008.
However, while not as striking, the results of the study are very similar over the last three years as they are over seven.
According to FE Analytics, the best funds for income generation over that time have delivered a return of 36.21 per cent over that period, which is better than the sector and the worst funds for income.
Performance of composite portfolios vs sector over 3yrs
Source: FE Analytics
Again, the majority of those funds within that portfolio, such as PFS Chelverton UK Equity Income, Schroder UK Alpha Income and Old Mutual UK Equity Income, have outperformed the sector over three years.
On the other hand, the majority of the funds that have delivered a below average income have underperformed against the sector over that time.
Charles Hepworth (pictured), investment director at GAM, says it is no surprise that the funds that have generated the most amount of income have outperformed.
“Really, this shows that value trumps growth over the long term as these equity income funds, as they are looking for yield, will tend to focus on value,” Hepworth explained. “Also, when you are rolling that income back in as cash then it will obviously help returns.” However, Hepworth also says that the results of the study reflect that investors should concentrate more on income generation, rather than just yield.
“We don’t target a yield requirement, though most of those managers will have to deliver a yield which is more than the FTSE All Share because of sector restrictions ,” he said.
“But, yes, we wouldn’t go chasing yields of 5, 6, 7 or 8 per cent because ultimately, they will have to cut those dividends and those yields will retrench.”
One fund the manager uses is the £18m Ardevora UK Income fund, which is headed up by Jeremy Lang.
It was launched in January 2011 and according to FE Analytics, it has returned 60.82 per cent over that time, making it a top quartile performer. Also, investors who bought £1,000 worth of units in the fund three years ago will have earned £122.63 of income, which is above the sector average.
FE Trustnet will be speaking to the manager of this fund in the coming two weeks.
