UK equity income funds have struggled to attract investor’s money but there are three that have consistently beaten their peers, according to the latest FE Trustnet study.
The IA UK Equity Income sector has proved unpopular with investors, as figures from the Investment Association (IA) show that it has seen net outflows in every month since April 2017 with a net total of £1.8bn exiting the sector.
Conversely, IA Mixed Investment 0-35% Shares, 20-60% Shares and 40-85% Shares are among 11 IA sectors that have not experienced a month of net outflows for more than 12 months.
However, there are some funds in the IA UK Equity Income sector that have proven to outperform their peers consistently over a range of short, medium and longer-term time periods.
Artemis Income, JOHCM UK Equity Income and Schroder Income are three such funds.
Performance of funds over 10yrs vs sector and benchmark
Source: FE Analytics *all figures to end-April 2018
They all manage over £1bn in assets under management (AUM) and have beaten their peer group over one-, three-, five- and 10-year time frames.
In this article, FE Trustnet presents the third article in its series that looks at the biggest funds across the IA universe to top the above performance tables to the end of April 2018. Last week, we covered the IA Global sector and the IA UK All Companies before that.
This week FE Trustnet turns to the IA UK Equity Income sector.
JOHCM UK Equity Income
First up is the £3.7bn JOHCM UK Equity Income fund, which has produced the highest 10-year total return of the three funds studied.
Over the past decade it has posted a total return of 203.10 per cent compared to the IA UK Equity Income sector’s average return of 98.25 per cent and the FTSE All Share’s 90.89 per cent in the same period.
Performance of fund vs sector and benchmark over multiple time frames
Source: FE Analytics
The fund also landed in the top quartile of its sector over one, three and five years, while producing the third best one-year performance in its sector of 14.41 per cent.
Investors should be wary that investing in this fund will not be a smooth ride. Its volatility over 10 years averages out at 17.18 per cent, the fourth worst-in-sector.
JOHCM UK Equity Income has been managed by Clive Beagles and James Lowen since its launch in 2004.
The fund aims to earn an above-average income while also achieving capital appreciation. The managers look to do this with a tried-and-tested approach where Beagles considers the macroeconomic aspect and Lowen performs bottom-up analysis.
In order for a stock to be eligible for investment it must have a prospective yield above that of the FTSE All Share. Equally, should the yield of a stock already in the portfolio fall to this level it will be sold. This is a distinct, high-yield approach in which many of the holdings are small and mid-cap companies.
The fund is heavily overweight in financials, investing more than a third of its portfolio in the sector, while being heavily underweight in consumer good and health care.
In a monthly insight to investors, the managers said that markets have come back strongly in recent months, which has been driven by the attraction to value created by a weak first quarter of the year.
JOHCM UK Equity Income has soft closed to new investors but a combination of its strong performance and a small number of inflows over the past year has seen the AUM grow by £600m.
It has an historic yield of 4.12 per cent and a clean ongoing charges figure (OCF) of 0.81 per cent.
Schroder Income
Next on the list is the £2.3bn Schroder Income fund, which is the oldest portfolio on the list having launched in 1987. Current managers, Kevin Murphy and Nick Kirrage, have been at the helm since 2006.
Their investment approach is based on the belief that markets overreact in the short term and so the managers take a long-term outlook. They look for companies that are undervalued and sometimes invest in stocks that have structural problems.
Performance of fund vs sector and benchmark over multiple time frames
Source: FE Analytics
Analysts at Square Mile Investment Consulting and Research said in a recent note that the managers’ strategy is more contrarian than a traditional equity income fund and that investors can expect more volatility as a result.
This has proven to be the case over the past 10 years as the fund’s average volatility has been 17.89 per cent, the sector’s second highest.
They added: “When markets are low and falling, the managers are likely to be aggressively positioned as often they see such short-term volatility as an opportunity.
“This can be painful in the short term for investors, but these times may mark the periods when the strategy has the greatest opportunities ahead of it.”
The fund is the top performing fund in its sector over a one-year period and has returned 15.35 per cent, almost triple that of its average peer. Over three and five years it has also returned top quartile performance, including a 10-year total return of 170.24 per cent.
Schroder Income, which has seen its AUM rise by £306m over the last 12 months thanks to its strong performance and £62m in netinflows, has an historic yield of 3.39 per cent and an OCF of 0.91 per cent.
Artemis Income
The final fund is Artemis Income, which has an AUM figure of £6.3bn and is the largest fund in the IA UK Equity Income sector.
The three FE Crown-rated fund launched in 2000 and has been run by Adrian Frost since 2002. A year after taking the reins, Adrian Gosden joined Frost as co-manager in 2003 until his departure in 2016. Now Nick Shenton is co-manager on the mandate and has been there since 2014.
Talking about the investment approach, the managers admit that it’s difficult to find a stock that ticks all the boxes, so the common denominators they look for in companies are a competitive advantage, a barrier to entry and the ability to create value in a sustainable way.
Other key things they value are a company’s ability to generate cash profits and pay dividends that will grow over time.
Performance of fund vs sector and benchmark over multiple time frames
Source: FE Analytics
A strong performer, Artemis Income has returned 133.83 per cent over 10 years, beating the IA UK Equity Income sector by 35.58 percentage points and the FTSE All Share index by 42.94 percentage points, which it is benchmarked against.
This has been the least volatile of the three funds in this list and at 14.12 per cent over 10 years, it ranks in the top quartile of its peers.
It has also produced superior returns to its peer group over the one-, three-, and five-year metrics with top quartile rankings.
Despite the fund’s good performance, it has seen its AUM figure drop from £6.5bn in the past year with £702m in net outflows more than negating the £457m in performance uplift.
However, analysts at Square Mile Investment Consulting and Research remain wary of the restrictions of Artemis Income because of its large size.
“Although we do view the fund’s size with some caution we acknowledge that the managers tend to focus on stocks with larger capitalisations. However, we also note that the opportunity to consider companies with smaller market capitalisation is somewhat reduced.”
Artemis Income has an historic yield of 3.66 per cent and an OCF of 0.79 per cent.