Colin Morton’s Franklin UK Equity Income fund is the IA UK Equity Income strategy that has consistently sat in the upper deciles of its peer group for a broad range of metrics over the past five years, Trustnet research shows.
Each year, we review the main Investment Association sectors by looking at their members’ performance on a wide range of measures and identifying which have performed strongest overall.
All 10 metrics that have gone into the average decile ranking can be seen in the box to the side.
Having already looked at the IA UK All Companies sector, we now turn our attention to the other main UK equity peer group – IA UK Equity Income – to see how its members performed in the five years to the end of 2019. It’s important to note that this research does not cover the coronavirus bear market that global markets are currently working through.
As mentioned, the fund taking first place in this research is Franklin UK Equity Income. It has an average decile ranking of just 2.5, thanks to a top-decile five-year return of 53.69 per cent, alongside a first-decile Sharpe ratio and ongoing charges.
Performance of fund vs sector and index over 5yrs to end of 2019
Source: FE Analytics
Headed up by lead manager Colin Morton with co-managers Ben Russon and Mark Hall, the £812m fund has a preference for companies that are likely to pay out a high level of dividends but trade at a relatively low valuations.
However, Morton will also buy businesses that currently have low dividend payouts but where there is an expectation that these will grow over time.
The FE Investments team, which has Franklin UK Equity Income on its Approved List, said: “This fund offers core exposure to UK equities in that it has a minimum 70 per cent allocation to large companies.
“The managers’ discipline around dividend yield, valuations, bottom-up fundamentals and macroeconomic considerations implies that the fund can behave differently and sometimes more contrarian versus peers, as was the case in 2016. However, this willingness to be different has contributed well to portfolio returns.”
Source: FE Analytics
In second place with an average decile ranking of 2.6 is Catherine Stanley’s BMO Responsible UK Income fund. It is in the IA UK Equity Income sector’s top decile for its five-year returns to the end of 2019 (48.3 per cent), alpha generation, volatility, Sharpe ratio, downside capture and upside capture.
The £351.6m fund focuses on high-quality, dividend-paying businesses but avoids companies with damaging or unsustainable practices. Areas avoided include nuclear energy, tobacco and weapons, as well as companies with negative performance in factors like human rights, labour standards and animal testing.
Royal London UK Equity Income came in third, with a 2.8 average decile ranking. Manager Martin Cholwill looks for reliable businesses with a strong business model and management team. He also considers free cash flow to be one of the most important metrics to consider when analysing companies.
Square Mile Investment Consulting & Research, which gives the fund an ‘A’ rating, said: “We hold this fund's longstanding manager in high regard. He is a highly experienced investor who, over the course of his extensive career, has honed his investment process across a number of market cycles.
“We believe the approach employed, which centres around cash flow and the sustainability of dividends, is wholly pragmatic given the fund's remit of seeking to grow its distributions over time. In order to achieve this, he constructs the portfolio with a base of solid, blue-chip companies supplemented with holdings in mediumsized companies that are often lower yielding, but have the ability to grow dividends in the future.”
The largest member of the IA UK Equity Income sector – Adrian Frost, Nick Shenton and Andy Marsh’s £4.8bn Artemis Income fund – came in eighth place out of 74 with a score of 3.2.
Meanwhile, Vanguard FTSE UK Equity Income Index – the only index tracker in the peer group – came in 46th place. It has an average decile rank of 6.1 for the 10 metrics examined.
Source: FE Analytics
At the very bottom of the table is ASI UK Income Unconstrained Equity, with an average decile rank of 8.8. It’s in the sector’s bottom decile for its 21.17 per cent total return over the five years in question, as well as its alpha, volatility, Sharpe ratio and downside capture.
This fund has performed very well at times, however, although its unconstrained means that it can behave very differently to the market at times – for better or for worse.
Square Mile gives ASI UK Income Unconstrained Equity an ‘A’ rating and said: “The fund's unconstrained, concentrated and all-cap approach means that position sizes are implemented without any regard to the stock's weight within the FTSE All Share index.
“The manager takes a high conviction view, resulting in his best ideas having the most amount of capital allocated to them and a stock will only be held if the manager has a positive view on it, regardless of its market size. As such, this fund tends to display a very high active share, which is the amount a portfolio differs from its benchmark.”
With assets of £1bn, this is a big fund but there are some larger IA UK equity income strategies on the above list of those that are in the bottom deciles for several metrics: the £2.7bn HL Multi Manager Income & Growth fund and the £2bn Halifax UK Equity Income fund.