Premier Optimum Income, MI Chelverton UK Equity Income and Man GLG UK Income are some of the UK equity income funds that have generated the highest income returns over recent years, according to FE Trustnet research. 
In a recent article, we examined IA UK Equity Income funds and their former peers that have moved over to IA UK All Companies to find out which had made the strongest capital returns over the five years to the end of June 2018.
That research found the LF Miton UK Multi Cap Income fund was in first place after growing capital by 55.34 per cent, followed by TB Evenlode Income (with a 51.98 per cent capital return) and MI Chelverton UK Equity Income (with a 50.75 per cent capital return).
Following a reader request, we’ve reviewed the same 90 funds to see how they compare for the return generated through income alone.
Total return and price of fund over 5yrs to end of Jun 2018
Source: FE Analytics
The chart above shows the total return and the capital return of the Premier Optimum Income fund, with the difference between the two being the amount that came from income. With an income return of 47.19 per cent over the period in question – or 78.7 per cent of its total return – this fund is in first place.
This should come as little surprise as the £113.3m Premier Optimum Income fund, which is managed by Chris White and Geoff Kirk, is an example of an ‘enhanced income’ fund and has a specific income target of 7 per cent per annum. Products such as this use covered call options to boost their income payouts by selling the potential capital gains of their equities.
White, head of UK equities at Premier Asset Management, said: “There is a particular focus on the dividend paying capability of a company for two reasons. Firstly, to provide an attractive yield.
“Secondly, companies that pay an attractive dividend typically have strong cash flow and balance sheet characteristics, which should lead to good share price performance. Stock selection concentrating on value and income has been the driver of returns and the fund remains focused on these factors.”
Other enhanced income funds are at the top of the table as well. Tim Rees’ Insight Equity Income Booster is in second place thanks to a five-year income return of 46.89 per cent (which was 99.6 per cent of its total return) while the team-managed Schroder Income Maximiser comes in third with 45.73 per cent (which is 90.5 per cent of the total return).
Santander Enhanced Income Portfolio and Fidelity Enhanced Income are within the top 10 but beating both is MI Chelverton UK Equity Income in fourth place. This £683.8m fund is managed by David Horner and David Taylor and has a bias towards small- and mid-caps.
Over the five years examined in this research, the four FE Crown-rated fund has made a 39.96 per cent return from income – or 44.1 per cent of its top-decile total return. As mentioned above, the fund was also highlighted in our previous article looking at capital returns as it came third in that study.
Horner and Taylor recently highlighted scope for the fund to perform even better from an income point of view, saying: “As a generalisation, over the past couple of years we have run our ‘winners’ to capture capital gain and after lengthy periods of strong performance we are now at the point that a number of these holdings are getting close to a 2 per cent yield, the point at which we will sell.
Source: FE Analytics
“Funds raised will be reinvested in stocks yielding more than 4 per cent, and as a result we expect the underlying yield on our portfolio to gently increase over the next few months.”
FE Alpha Manager Henry Dixon’s Man GLG UK Income fund also performed well in this research, coming in sixth place after delivering a 36.8 per cent income return over the five-year period. This is 43.8 per cent of its first-quartile 84.04 per cent total return.
The £689.1m fund, which focuses on out-of-favour opportunities, holds five FE Crowns and has an ‘A’ rating from Square Mile Investment Consulting & Research. Square Mile’s analysts said: “Whilst there is a clear focus on income with this strategy, we believe that the manager and his investment process will not allow for capital to be placed at risk just for the sake of income.”
As might be expected, the delivery of a high income return has tended to come in hand with a high total return. Of the 25 funds highlighted in the table above, 13 are in their sector’s top quartile for total return as well.
While Premier Optimum Income is top quartile, other ‘enhanced income’ funds such as Insight Equity Income Booster, Schroder Income Maximiser and Santander Enhanced Income Portfolio are in the third quartile; Fidelity Enhanced Income is bottom-quartile. This is down to the fact that they have sacrificed growth for income.
Conventional equity income funds have fared better from a total return point of view. MI Chelverton UK Equity Income and Man GLG UK Income are joined in the top quartile by the likes of Majedie UK Income, AXA Framlington Monthly Income, Marlborough Multi Cap Income, LF Miton UK Multi Cap Income and Slater Income.
Seven of the 25 funds with the highest income returns are in the second quartile for five-year total returns, including Santander Equity Income Unit Trust, Premier Monthly Income and Neptune Income. Four are third quartile while only one – Fidelity Enhanced Income, as mentioned above – is in the bottom quartile.
Total return and price of fund over 5yrs to end of Jun 2018
Source: FE Analytics
At the bottom of the table for income alone returns is Franklin UK Rising Dividends, which has paid out 16.94 per cent of the five years to the end of June 2018. The fund does not aim for a high payout today, however, focusing instead on growing its dividend over time; it is top-quartile for total returns.
It is just one of two funds that are in the bottom 25 for income returns but are in the top quartile for total returns. The other fund achieving this is Threadneedle UK Growth & Income.
Two funds are in the second quartile (Scottish Widows Multi-Manager UK Equity Income and Rathbone Income) while six are third-quartile.
However, some 15 funds are in the bottom quartile of their sector for total returns in addition to having some of the lowest income returns. These include Jupiter Growth & Income, Invesco Perpetual Income and HSBC UK Growth & Income.