The most consistent funds of the decade: IA UK Equity Income

Royal London UK Equity Income is the most consistent IA UK Equity Income fund over the past decade, according to data from FE Analytics, beating its sector average in nine of the past 10 calendar years.

Eight other funds beat the sector average in seven of the past 10 years.

Most consistent IA UK Equity Income funds over 10 calendar years

Source: FE Analytics

Martin Cholwill’s Royal London UK Equity Income fund invests in firms paying dividends that are high and have the potential to grow. To unearth these, he focuses on cash-flow, which he says is more difficult for companies to manipulate than other earnings figures. He also prefers reliable companies that have a strong business model and skilled management team.

The team at Square Mile hold Cholwill (pictured) in high regard, describing him as “a highly experienced investor who has honed his investment process across a number of 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,” said Square Mile’s analysts.

“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.”

FE Invest said Royal London UK Equity Income’s high exposure to medium-sized companies means its share price can fluctuate more wildly than its peers, although it should not be viewed as a mid-cap fund as Cholwill invests with little regard for market capitalisation.

It added: “The fund may benefit from being heavily invested in medium-sized companies, as the larger dividend-payers have been very popular in recent years and their share prices have increased to the point where some commentators say they look overvalued.”

Cholwill expects economic conditions in the UK to be challenging this year and is planning for “anaemic” growth.

“Markets hate uncertainty and we are likely to have Brexit-induced bouts of market volatility from time to time,” he said.

However, he added that despite this uncertainty, he is optimistic the stock market can continue to grind higher as a result of the low returns offered by alternative asset classes such as cash and government bonds.

“Overall, the fund is underpinned by its focus on strong market positions, cashflow-backed dividends and robust balance sheets, which should provide resilience in a whole range of possible economic outcomes,” Cholwill said.

Royal London UK Equity Income has made 139.51 per cent over the past decade, compared with 84.62 per cent from its FTSE All Share benchmark and 84.25 per cent from its sector.

Performance of fund vs sector and index over 10yrs

Source: FE Analytics

The fund is £1.93bn in size, having grown by £400m over the past 18 months. However, Square Mile pointed out that the fund remains smaller than many of its competitors and that the increase in size does not appear to have inhibited Cholwill’s ability to re-shape the portfolio when required.

Royal London UK Equity Income is currently yielding 3.93 per cent. Investors who put a £10,000 lump sum into it 10 years ago would have received £4,489.79 in income alone over this time.

The fund has an ongoing charges figure (OCF) of 0.66 per cent, compared with 0.93 per cent from the sector average.

In terms of the funds that have beaten the sector average in seven of the past 10 calendar years, JOHCM UK Equity Income was the only one that delivered a higher total return than Cholwill’s vehicle over this time, making 174.85 per cent.

Performance of fund vs sector and index over 10yrs

Source: FE Analytics

Like Royal London UK Equity Income, it has a higher exposure to small- and mid-cap stocks than the sector average.

Last month, Hargreaves Lansdown’s Mark Dampier highlighted JOHCM UK Equity Income as a suitable fund for contrarian investors who think the UK looks undervalued as a result of overblown Brexit fears.

“At the moment investors think the UK is deeply uncomfortable which is why they have been selling, but actually that is a better reason to buy in,” he said.

The fund’s managers James Lowen and Clive Beagles are particularly positive on UK banks at the moment and hold Barclays and Lloyds in their top-10. They recently told FE Trustnet they believe the recent uptick in CPI is not an anomaly but part of a longer-term trend and that the Bank of England is likely to raise interest rates regardless of what happens to inflation.

“The open tap of new labour supply has definitively been turned off [post-Brexit],” Lowen added. “We’ve been talking to companies and particularly domestically orientated companies about this issue a lot; many of them are reporting more and more labour shortages and difficulties in getting hold of staff.

“You combine that with an environment in which government austerity is fading. You’ve seen the commitment to raise public sector pay next year. We do think this wage inflation in the UK will pick up and this is why they’re putting interest rates up in the UK.”

JOHCM UK Equity Income is soft-closed to new investors, although it is still available on certain platforms. The fund is £3.4bn in size, has an ongoing charges figure of 0.8 per cent (but levies a performance fee) and is yielding 4.29 per cent.

Investors who put a £10,000 lump sum into the fund 10 years ago would have received £5,355.93 in income alone over this time.