Top-performing funds such as AXA Framlington Monthly Income, Royal London UK Equity Income and LF Miton UK Multi Cap Income have consistently generated some of the IA UK Equity Income sector’s strongest numbers for a range of risk and return measures.
These are the findings of the latest article in this series, in which FE Trustnet examines the Investment Association sectors across 10 different metrics to see which funds have persistently been at the top of their peer group from a host of viewpoints.
To recap, this article will examine the average decile ranking for IA UK Equity Income funds when it comes to five-year returns up to the end of 2017, the annual returns of 2017, 2016 and 2015, annualised volatility, alpha generation, Sharpe ratio, maximum drawdown and upside and downside capture relative to the sector average.
Performance of fund vs sector and index over 5yrs to the end of 2017
Source: FE Analytics
According to this research, AXA Framlington Monthly Income – which is managed by George Luckraft and holds four FE Crowns – sits in the top spot after achieving an average decile ranking of 2.9.
The £292.2m fund is in the peer group’s top decile over the five-year period in question thanks to its 91.67 per cent total return. It’s also in the first decile for alpha generation, annualised volatility, maximum drawdown, Sharpe ratio and downside capture.
As its name suggests, the fund aims to pay out a monthly income with the potential for long-term capital growth. Luckraft is targeting “well-run and well-financed” companies that are offering an attractive and growing income stream, with top holdings including Royal Dutch Shell, BP and HSBC.
In terms of income generation, AXA Framlington Monthly Income has paid out £2,795.34 on an initial investment of £10,000 made at the start of 2013. The average fund in the IA UK Equity Income sector has paid £2,778.57 over this five-year period.
In second place with an average decile ranking of 3.1 and a 111.31 per cent five-year total return is Gervais Williams and FE Alpha Manager Martin Turner’s £1bn LF Miton UK Multi Cap Income fund. It’s top decile for five-year performance, 2015 returns, alpha, annualised volatility, Sharpe ratio and downside capture, while paying out £3,330.11 over five years on a £10,000 initial investment.
Unlike most UK equity income portfolios, the five FE Crown-rated fund focuses on opportunities in smaller companies; some 13.8 per cent of assets are in the FTSE Small Cap index with another 34.1 per cent listed on the FTSE AIM.
The FE Invest team, which has the fund on its Approved List, said: “Gervais Williams and Martin Turner adopt a highly distinctive approach to running an equity income portfolio. Their area of expertise is to identify smaller companies which are able to grow irrespective of the market element. Their approach is robust, as highlighted by the fund’s track record of growing dividends and achieving strong capital gains.”
Source: FE Analytics
Martin Cholwill’s £2bn Royal London UK Equity Income fund is in third place. It also has an average decile ranking of 3.1 and has made a first-decile 90.53 per cent return over the five years examined here. It is also in the sector’s top decile for alpha generation, Sharpe ratio and upside capture.
The fund has paid out £2,659.94 on a £10,000 investment. In his search for a growing income stream, Cholwill focuses on companies’ free cash flows as well as balance sheets, business models and management teams.
Square Mile Investment Consulting & Research, which gave the fund an ‘A’ rating, said: “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.”
The largest fund in the sector – LF Woodford Equity Income – doesn’t yet have a five-year track record. However, the £6.1bn Artemis Income fund (which is the second biggest) does and it scored 4.6 in this research, ranking it 24th out of 75 funds.
Managed by Adrian Frost and Nick Shenton, the fund is not in the top decile for any of the measures we looked at in this research. However, it remains a popular offering and has established a solid long-term track record.
Other large IA UK Equity Income members include: the £4.1bn Threadneedle UK Equity Income fund, ranked 23rd with a 4.6 average decile score; the £3.5bn JOHCM UK Equity Income fund, ranked 20th with a score of 4.3; and the £3.2bn Trojan Income fund, ranked 13th after scoring 3.9.
Performance of fund vs sector and index over 5yrs to the end of 2017
Source: FE Analytics
Sitting at the very bottom of the table is Aberdeen UK Equity Income, which has an average decile ranking of 8.8 for the 10 metrics we have examined in this research.
The £159.3m fund is in the peer group’s bottom decile for five-year returns, performance in 2015, alpha generation, maximum drawdown, Sharpe ratio and downside capture.
Other funds at the bottom of the rankings in this research are HSBC Income (8.2 average decile ranking), Neptune Quarterly Income (8.2 average decile ranking), Vanguard FTSE UK Equity Income Index (8.1 average decile ranking), Scottish Widows UK Equity Income (8 average decile ranking) and Halifax UK Equity Income (7.9 average decile ranking).