28th July 2014
Equity income funds are hugely popular among UK investors. According to the latest count from trade body, the Investment Management Association, British investors ploughed a hefty £270m into UK equity income portfolios during the month of May alone – and altogether Britons now have a massive £60.8bn tied up in these vehicles.
Their appeal is straightforward enough in that they aim to deliver an attractive income as well as capital growth by investing in the shares of dividend paying corporations, in other words businesses which share their profits with their investors.
Equities have rewarded their holders very well in capital terms over the last year, helping to boost the attraction of investing in these funds – and given that consumer price inflation sits at 1.9%, cash offers little in the way of an alternative.
But when it comes to selecting a fund, some are more worthy of investor attention than others according to Sanlam Private Investments, which has released its latest Income Study, which positions itself as the definitive investor guide to UK equity income funds. It seeks to highlight the portfolios with a proven ability in producing a decent level of income and long-term capital growth, as well as naming and shaming the portfolios which have generated consistently poor returns.
The White List
Sanlam’s, White or ‘buy’ List highlights the funds that have produced consistent superior total returns, without taking excess risk, over the past five years. Topping the table is Unicorn UK Income. The fund with a yield of some 3.9%, over the past five years would have provided almost £33 in income alone, on a £100 investment. However its lead manager, John McClure sadly passed away in June but Paul Surguy, head of managed funds, Sanlam Private Investments, believes it has been passed onto worthy successors. He says: “He leaves two highly competent managers in charge. Simon Moon and Fraser MacKersie have learned their craft from John and we believe they will continue to produce solid risk-adjusted returns with their focus on smaller companies with strong cash flows and well covered dividends.”
Davids Horner and Taylor have also continued to generate strong returns on their PFS Chelverton UK Equity Income portfolio from their emphasis on smaller companies with high starting dividends according to the study. The fund which yields 4.6%, would have delivered an income of £43.8 on a £100 investment and on the same basis, the 3.7% yield on the Royal London UK Equity Income fund would have achieved £32.2 while JOHCM UK Equity income, with a 3.9% income would have delivered £32.7.
The Black List
Sanlam’s Black – or sell – list houses more than £7bn of investors’ cash. “It does concern us that investors will endure extended periods of underperformance. “Scottish Widows have been rooted to the bottom of the list for so long, we wonder who can be left invested,” says Surguy. The SWIP UK Income fund, would have delivered a £23.3 income on a £100 investment over the past years while the Scottish Widows UK Equity Income fund would have achieved £23.6.
Other candidates on the under-performers list are Newton Higher Income which has changed process once in the last eighteen months, and managers twice, also continues to struggle. Ben Whitmore at Jupiter has also not managed to turn the Income Trust, around thus far says Surguy. Other named on the Black List include JPM UK Higher Income and Neptune Income.