BMO Responsible UK Income is the most consistent IA UK Equity Income fund of the past decade, beating the FTSE All Share – the most common benchmark in the sector – in nine of the past 10 calendar years.
Threadneedle UK Equity Income finished in second place, outperforming in eight of the past 10 calendar years, while another 13 of the 65 funds in the sector with a long enough track record managed the feat in seven.
Performance of funds vs sector and index
Source: FE Analytics
BMO Responsible UK Income is run by a six-strong team, headed up by Catherine Stanley.
The team takes a bottom-up stockpicking approach, with a clear idea about what type of businesses it will and won’t buy, paying particular attention to quality, risk and longevity.
Stanley said ESG (environmental, social & governance) and positive sustainability analysis helps her make judgments on all of the factors above.
“We believe that investing responsibly naturally leads to buying businesses with attractive characteristics and sustainable futures,” she added.
“While our responsible investing screens mean that there are substantial parts of the market where we will not invest, such as tobacco, oil & gas, coal, mining and defence, we still aim to construct a diversified portfolio of 55 to 70 names.”
The fund has a low level of turnover, with the team taking a multi-year view on potential holdings and aiming to compound returns over the long term.
Every holding in the portfolio is expected to make a contribution to the income requirement.
BMO Responsible UK Income made 163.85 per cent over the period in question, compared with 126.46 per cent from the sector and 118.28 per cent from the FTSE All Share.
It outperformed the IA UK Equity Income peer group average in seven of the past 10 calendar years.
The £379m fund has an ongoing charges figure (OCF) of 0.8 per cent and is yielding 4.1 per cent. Someone who invested £10,000 in the fund at the start of 2010 would have received £5,667.46 in income alone over the next decade.
Next up is Threadneedle UK Equity Income, headed up Richard Colwell, who asks the following questions when considering a potential investment: what is the business model and can the business continue to grow? Does the business have sufficient financial strength and can it successfully convert earnings streams into cash flows? And finally, does the firm have good managers in place who can allocate capital efficiently?
The team at Square Mile Investment Consulting & Research is a fan of Threadneedle UK Equity Income, saying: “We believe this strategy is a sensibly managed UK equity income fund, which has a bias towards larger companies, and one that should serve investors well over most market conditions.”
However, while the fund has done consistently well over the past decade, Colwell warned investors not to rely on a continuation of this performance profile.
“I’m pleased that we’ve delivered a rolling three- and five-year track record over the last 10 and 15 years that is attractive and adds up to something that clients can make use of, but this is not a fund that is designed to religiously outperform each year,” he told Trustnet in 2019.
“Because if you’re aiming for that, you’ll end up with a portfolio that looks like Norfolk. I want a portfolio that looks a bit like the Peak District.”
Data from FE Analytics shows Threadneedle UK Equity Income made 168.71 per cent over the 10-year period in question. The £4.3bn fund has an OCF of 0.83 per cent and is yielding 4 per cent.
Performance of funds vs sector and index over 10yrs
Source: FE Analytics
Someone who invested £10,000 in the fund at the start of 2010 would have received £5,988.77 in income alone over the next decade.
While Royal London UK Equity Income only outperformed the FTSE All Share in seven of the past 10 calendar years, it beat its sector in nine of these.
Square Mile holds this fund’s manager Martin Cholwill in high regard, calling him a “highly experienced investor” who has honed his process across numerous market cycles.
“We believe the approach employed, which centres around cashflow and the sustainability of dividends, is wholly pragmatic given the fund’s remit of seeking to grow its distributions over time," the team added.
“In order to achieve this, he constructs the portfolio with a base of solid blue-chip companies supplemented with holdings in medium-sized companies that are often lower yielding, but have the ability to grow dividends in the future.
“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.”
Royal London UK Equity Income has made 200.18 per cent over the period in question. The £2.2bn fund has an OCF of 0.72 per cent and is yielding 4.33 per cent.
Someone who invested £10,000 in the fund at the start of 2010 would have received £6,430.19 in income alone over the next decade.