Several ‘enhanced income’ strategies, a macro-thematic fund and an index tracker are among the UK equity funds that paid out the highest dividends to their investors across 2019, Trustnet research shows. 
Equity income strategies have fallen out of favour with investors over recent years, with the IA UK Equity Income sector facing heavy outflows and negative publicity from the collapse of Neil Woodford’s investment empire.
However, equity income remains an important component of many investors’ portfolios and, with this in mind, Trustnet looked back over the past year to see which UK funds made the biggest income payouts in 2019.
If we rank both the IA UK Equity Income and IA UK All Companies sectors by the amount of income paid out on an initial £10,000 investment made at the start of 2019, then – as would be expected – the various ‘enhanced income’ funds are at the very top of the list.
Source: FE Analytics
‘Enhanced income’ funds use derivatives to boost income, by writing covered call options to sell the potential capital gains of their equities then distributing the proceeds of this as income.
This allows them to offer a more attractive yield than a ‘conventional’ equity income strategy and this is reflected in the table above.
BNY Mellon Equity Income Booster was the UK fund with the highest income payout of 2019 after distributing £843.25 on an initial £10,000 investment and it uses such a strategy.
The £101.4m fund is managed by Tim Rees and was yielding 7.62 per cent at the end of 2019. Its portfolio is built around UK equity income stalwarts such as Royal Dutch Shell, Astrazeneca and HSBC.
BNY Mellon Equity Income Booster has generated high income levels as aimed – it has yielded in excess of 7 per cent in each of the past five years. However, a look at its price return shows how these kinds of strategies sacrifice capital returns in favour of income.
Capital and total return of fund over 2019
Source: FE Analytics
In the chart above, the red line is the fund’s total return, while the blue is its capital growth. Like all ‘enhanced income’ funds, the bulk of the total return came from income.
Other ‘enhanced income’ funds found on the list above include Schroder Income Maximiser, Fidelity Enhanced Income and Premier Optimum Income, which take second, third and fourth places respectively for income payouts in 2019.
The highest ranked ‘conventional’ UK equity income strategy is Stephen Bailey and Jamie Clark’s £96.6m Liontrust Macro Equity Income fund. It paid out £640.15 on an investment of £10,000 made at the start of the year and ended 2019 with a yield of 5.59 per cent.
Aiming to produce a high level of income with the potential for capital growth, the process behind the fund analyses economic, political, social and cultural developments to identify ‘macro themes’.
Bailey and Clark describe a ‘macro theme’ as “an undiscounted, structural change in the process of realisation”, believing that identify these allows them to find unappreciated investment ideas. Themes currently at play in the portfolio include rising rates, population ageing, scarce resources, digital economy and battery revolution.
Capital and total return of fund over 2019
Source: FE Analytics
The chart above demonstrates how a ‘conventional’ equity income fund tends to have a higher proportion of its total return from capital growth, and a lower share from its income payments, than an ‘enhanced income’ strategy.
Some other notable funds can be found on the above list. LF ASI Income Focus, formerly known as LF Woodford Income Focus, appears in seventh place after paying out £627.91 last year, on an initial £10,000. This was one of the fund’s managed by Neil Woodford, who closed his asset management house last year amid high outflows, poor returns and fund suspensions.
The fund’s high income payout in 2019 is likely down to the fact that it posted a total return loss of 20 per cent in 2018, meaning an investment at the start of 2019 allowed plenty of units to be purchased and a yield of 7.21 per cent to be generated. Investors still lost money in total return terms across 2019, however.
The fund was recently taken over by Aberdeen Standard Investments’ Thomas Moore and Charles Luke, who overhauled the portfolio in several ways before it was re-opened.
Meanwhile, the only index tracker in the IA UK Equity Income sector – Vanguard FTSE UK Equity Income Index – appears on the list of 2019’s highest income payers. The fund paid out £620.83 on £10,000 invested at the start of the year, yielding 5.49 per cent.
Other well-known funds among the 25 highest income-payers of 2019 include Man GLG UK Income, JOHCM UK Equity Income, Premier Income and MI Chelverton UK Equity Income.
In a future article, Trustnet will reveal the funds that have made the largest income payouts over the past five years.