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The ‘best of the best’ income generators in the UK equity space

05 September 2017

Research from FE Trustnet highlights four FE Alpha Managers that have generated significantly higher total returns and dividend pay-outs than their average peer in the IA UK Equity Income sector.

By Lauren Mason,

Senior reporter, FE Trustnet

Chris Reid, Martin Turner and Siddarth Chand Lall are among some of the very best UK equity FE Alpha Managers when it comes to generating both total returns and income pay-outs over five years, research from FE Trustnet shows.

Given today’s low interest rate environment in the UK and expectations that it won’t rise rapidly anytime soon, the hunt for yield is likely to remain a priority for many investors.

However, this often comes with the caveat that investors must choose to prioritise either higher growth and a lower yield, or a higher yield but less opportunity for capital appreciation.

But, what if investors can have their cake and eat it too?

FE Trustnet has taken each fund with a five-year track record within the IA UK Equity Income sector and calculated its total return and the income paid out on an initial £10,000 investment over five years.

Out of these 73 funds, we found that the average total return over this time frame is 70.45 per cent compared to the FTSE All Share and sector average (which of course incorporates new funds into the data as they are launched) returns of 63.66 and 67.49 per cent respectively.

In terms of income alone, the average fund in the sector with a five-year track record would have paid out £2,602.98 based on an initial £10,000 investment.

Out of these 73 funds, however, 10 of them are run by FE Alpha Managers – those who have undergone rigorous quant-based and qualitative testing by the FE Research team and have been recognised for their strong long-term track records in generating risk-adjusted alpha.

Their abilities are evident in our research; while the average UK equity income fund without an FE Alpha Manager at its helm has an average five-year total return of 67.66 per cent and a five-year pay-out on a £10,000 investment of £2,579.34, those run by FE Alpha Managers have achieved five-year total returns and income pay-outs of 88.03 per cent and £2,751.95 respectively.

As such, we decided to focus our attention on these star managers and find which of them have achieved the very best for their investors in terms of income and total returns over five years.

To do so, we made a list of the funds run by these FE Alpha Managers which have managed beat the average dividend pay-outs and total returns relative to their star manager peers.

 

Source: FE Analytics

We were left with a list of four funds, as shown in the above table.

Out of these, the FE Alpha Manager generating the highest total return is Martin Turner, who heads up the five crown-rated CF Miton UK Multi Cap Income alongside veteran investor Gervais Williams.

Over five years, the £923m fund has outperformed its average peer and the FTSE All Share (which it is not benchmarked against) by 59.58 and 63.81 percentage points respectively with a total return of 127.47 per cent.

In terms of income alone, investors would have received £3,076.75 in dividends based on an initial £10,000 investment over the same time frame.


Turner and Williams aim to provide attractive levels of income alongside capital growth over the long term and do so through an unrestricted portfolio of UK-listed companies.

While the managers are able to invest across the market cap spectrum, the fund tends to have a significant weighting towards AIM stocks and companies that are small in size.

For instance, it currently has a 35.2 per cent weighting in AIM stocks, 17.7 per cent in UK mid caps, 17 per cent in FTSE 100 stocks and 15 per cent in the FTSE Small Cap.

Given reduced liquidity further down the market cap spectrum, Turner and Williams ensure the portfolio is highly diversified and currently hold 151 stocks within the fund.

Only one stock accounts for more than 2 per cent of the overall portfolio – which is shipping service Stobart Group at 2.4 per cent – while its next largest holdings (IG Design Group and a FTSE 100 PUT Option) account for 1.9 per cent each.

Despite the small size of the stocks the fund holds, its diversification means it is in the top quartile for its annualised volatility, Sharpe ratio (which measures risk-adjusted returns) and downside risk ratio (which predicts a fund’s susceptibility to lose money during falling markets) over five years.

CF Miton UK Multi Cap Income has a clean ongoing charges figure (OCF) of 0.81 per cent and yields 3.9 per cent.

The fund on the list with the greatest dividend pay-out on a £10,000 investment over five years is Chris Reid’s Majedie UK Income at £3,553.21. It has also generated the second-highest total returns over the given time frame, having outperformed its average peer and benchmark by 35.58 and 39.41 percentage points respectively over five years.

Performance of fund vs sector and benchmark over 5yrs

 

Source: FE Analytics

Reid and co-manager Yuri Khodjamirian adopt a bottom-up, high-conviction approach to stock selection.

The £897m fund currently has 48 holdings with Royal Dutch Shell, HSBC and BP its three largest individual constituents. While Shell accounts for 8.1 per cent of the portfolio, HSBC and BP have been allocated 7.4 and 7 per cent of the fund respectively.

Given its highly-concentrated portfolio, investors may be unsurprised to find it is in the bottom quartile for its downside risk, annualised volatility and maximum drawdown (which measures the most money lost if bought and sold at the worst possible times) relative to its peers over five years. This is because it struggled to keep up with its sector average during 2015 and 2016.

However, those who have endured the volatility over the years have been well-rewarded (with the usual caveat of course that past performance is no guide to future returns).

Majedie UK Income has a clean OCF of 0.77 per cent and yields 4.67 per cent.

The manager on the list with the third-best total return and income pay-out over five years is Siddarth Chand Lall, who heads up the £1.5bn Marlborough Multi Cap Income fund.

Over five years, the fund has returned 101.42 per cent compared to its average peer and the FTSE All Share index’s (which it is not benchmarked against) respective returns of 67.49 and 63.66 per cent.

In terms of income alone, it would have paid out £2,933.11 based on an initial £10,000 investment over five years.


Lall adopts a bottom-up approach to stock selection and has a highly-diversified portfolio of 142 stocks. Again, this is to minimise liquidity concerns given that he finds many of the best opportunities further down the cap spectrum. This should come as no surprise to investors, given that he works alongside micro-cap veteran and fellow FE Alpha Manager Giles Hargreave.

In terms of market cap weightings, Marlborough Multi Cap Income currently holds 37.6 per cent in small caps, 34.5 per cent in mid caps and 12.2 per cent in micro-caps. In contrast, it has just a 3.4 per cent allocation to mega caps and a 4.1 per cent weighting in large caps.

Lall adopts a blended approach to portfolio construction, allowing him to allocate more to value or growth plays as and when he sees fit.

Despite achieving strong levels of capital appreciation over the years, the manager retains most of his focus on providing investors with high levels of income.

Over five years, the fund has a bottom-quartile maximum drawdown and annualised volatility due to a torrid 2016 when it finished the year down 3.21 per cent. During the four other years, however, it remained in the first or second quartile for its total return and is comfortably beating its average peer year-to-date.

Marlborough Multi Cap Income has a clean OCF of 0.8 per cent and yields 3.57 per cent.

The fourth and final manager to have made the list is Mark Slater and his £122m Slater Income fund. Over five years, it has outperformed the sector average and the FTSE All Share (which again, it is not benchmarked against) by 21.99 and 25.82 percentage points respectively with a total return of 89.48 per cent.

Performance of fund vs sector and benchmark over 5yrs

 

Source: FE Analytics

Slater – alongside co-managers Barry Newton, Ralph Baber and Nigel Milton – is a bottom-up stockpicker who aims to provide growing levels of income alongside capital appreciation through a multi-cap portfolio.

While some of his largest holdings include mega-caps such as Rio Tinto, Legal & General Group and Imperial Brands, he also has significant exposure to small- and mid-cap stocks such as insurance firm Chesnara, pub group Marston’s and energy resources consultancy RPS Group. Slater is also unafraid to utilise his overseas allowance as and when he sees fit.

When it comes to risk metrics, the fund is in the bottom quartile for its five-year maximum drawdown and is in the third quartile for its annualised volatility and downside risk ratio.

As with a majority of the aforementioned funds though, investors with a stronger stomach have indeed been rewarded over the years in terms of both total returns and income pay-outs.

Slater Income has a clean OCF of 0.8 per cent and yields 4.27 per cent.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.