The LF Miton UK Multi Cap Income fund has remained at the top of Sanlam UK’s twice-yearly guide to the best UK equity income strategies for a third consecutive year.
At the other end of the closely watched Sanlam Income Study, which reviews and monitors performance of UK equity income funds, Schroder Income saw the biggest downward movement as it dropped to the foot of the study’s Grey List for funds that have fallen out of favour.
The Sanlam study is divided into three parts: the White List, featuring the best performers; the Grey List, for out-of-favour styles or an early warning for funds in decline; and the Black List, made up of consistent underperformers.
It considers the previous five discrete 12-month periods, five-year volatility and income distributed dividend over five years.
Overseen by veteran investor Gervais Williams and FE Alpha Manager Martin Turner, the £1.1bn, five FE Crown-rated LF Miton UK Multi Cap Income fund has delivered a total return of 102.57 per cent compared with a 57.60 per cent from its average peer.
Source: Sanlam Income Study
“Its high-ranking dividend yield versus peers, along with excellent and consistent performance are the reasons why, since qualifying for entry in the study, the fund has only ever placed first,” Sanlam noted.
Elsewhere in the White List there were few changes, with just three funds relegated in January 2018. As such, three funds have been promoted to the White List: Royal Bank of Scot Equity Income, Man GLG UK Income and Lazard Multicap UK Income.
Of these three, the five crown-rated Man GLG UK Income fund overseen by FE Alpha Manager Henry Dixon stood out in particular. The £350.6m fund moved up 32 places in the most recent July study and was ranked first for performance in 2017, moving up a further four places to the White list.
Sanlam said: “This is quite remarkable given that the fund entered our universe in July 2016 and was initially placed at the bottom of the Black List; Henry Dixon appears to have turned the fund around considerably since becoming lead manager in November 2013.”
Threadneedle UK Equity Income, Unicorn UK Income and R&M UK Equity Income moved onto the Grey List from the White List.
Having previously placed near the top of the Grey List, the Schroder Income fund – managed by FE Alpha Managers Kevin Murphy and Nick Kirrage – dropped further down to the foot of the list, the largest negative move in the latest edition of the study.
“This fund, whilst producing a respectable amount of income in the July 2017 study, is one of the poorest income payers in the January 2018 edition,” the study noted. “Furthermore, performance has been somewhat disappointing and the resultant volatility is relatively high.”
The fund struggled last year as the value trade fell out of fashion once again in 2017, delivering a total return of 9.33 per cent compared with a gain of 11.32 per cent for the average fund in the sector.
However, the Schroder Income Maximiser fund – which is managed by Murphy and Kirrage along with Mike Hodgson, Jeegar Jagani and Scott Thomson and uses derivatives to enhance its yield – positioned higher.
Source: Sanlam Income Study
Over five years, Schroder Income fund returned 73.96 per cent while the Schroder Income Maximiser fund has delivered a gain of 54.51 per cent.
Two funds dropped from the Grey List into the Black List – Ardevora UK Income and UBS UK Equity Income – with the former falling 28 places, as both suffered from performance issues.
Meanwhile, L&G UK Equity Income and Newton UK Income moved out of the Black List and onto the Grey List, replacing Ardevora and UBS.
There were few changes at the bottom with Aberdeen UK Equity Income switching places with HSBC Income for worst-ranked fund.
Philip Smeaton (pictured), chief investment officer at Sanlam UK, said that given the current low interest environment, there were a number of UK equity funds offering yields of between 4 per cent and 6 per cent. 
“One element that makes the income market attractive is the UK’s exposure to overseas earnings.,” he said.
“A large proportion of large-cap companies in the UK generate their earnings from overseas, with some benefitting even further by paying dividends in dollars or euros.
“While Brexit has presented a challenge to the UK economy, the sudden depreciation of sterling has meant those stocks have increased income payments.”
As the below chart shows, the UK remains one of the highest-yielding markets globally. Indeed, UK dividends rose to £94.4bn in 2017, according to the latest data from Link Asset Services (formerly known as Capita Asset Services), a 10.5 per cent year-on-year increase.
Source: Sanlam Income Study
Smeaton added: “There is a risk that investors purely motivated by yields could be falling into a trap. Chasing yields is a dangerous game – as eager investors pile into buying these stocks it becomes an ever-larger proportion of the index.
“Today this situation is exacerbated because risk-blind passive funds are then forced to buy more. Ultimately, this is pushing up the valuations of high dividend payers to unsustainable levels.
“Smart mangers with longer-term horizons will know to avoid these stocks as they are over-priced.”
Smeaton said that investors should remain sensitive to the total returns and avoid chasing stocks for income.
He explained: “For income-driven investors, the amount of income paid is the backbone of every portfolio; however, choosing the most suitable income stocks is critical for investors looking to achieve the best results.
“These yields are a valuable long-term strategy because reinvested income is the biggest overall contributor to total returns thanks to the compound interest.”