Investing for income – what to buy and what to sell from Sanlam Private Investments

29th July 2013

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With UK inflation running at a rate just shy of three per cent and interest rates stuck at historic lows, savers are looking to riskier assets to boost their income. Equity income funds are one such beneficiary writes Philip Scott.

Equity income funds are among the most popular types of investment funds among UK investors and are often at the core of many a portfolio.

For more than three decades Sanlam Private Investments, (formerly the Principal Group)  has been providing investors with a guide to the best and poorest performing equity income funds.

The fund managers, who run equity income portfolios, invest in firms which pay a dividend, in other words share their profits with their investors. Last year, UK companies paid out a total of £85bn in dividends to investors and 2013 is expected to mirror that result. Equity income funds are attempting to deliver investors an income as well as the potential for capital growth.

The consensus is that share prices of regular dividend paying firms tend to be less volatile than those of other companies. The big dividend payers in the UK are FTSE 100 listed giants Vodafone, Shell, BP, HSBC and GlaxoSmithKlein. Together these stocks made up 37 per cent of dividends paid to investors in 2012.

Longer term equities tend to deliver better results than other asset classes but investors should not focus purely on the income factor, as with all stock market investing, capital can fall in value. In addition dividends can be slashed or pulled altogether if a firm finds itself in need of money.

But the importance of dividends cannot be underestimated, as over the past 10 years, dividend payments accounted for more than half of the total returns received by equity investors in the UK.

Sanlam’s ‘white list’ consists of the best and most consistent performers while the ‘black list’ highlights the underachievers that investors need to walk away from. The average net dividend yield among the top 14 funds which inhabit the White list is 4.4 per cent – way ahead of inflation.

The full study, including the ‘Grey’ list which lists those portfolios on the precipice, can be found here. The report from Sanlam uses seven different criteria based on performance, volatility and the income distributed, with the most recent period of performance receiving a greater weighting

The White List

The Unicorn UK Income fund tops the widely observed list. It has a net dividend yield of 3.3 per cent and in the 12 months to the end of June has delivered 39 per cent to its investors.

JO Hambro UK Equity Income is also highlighted for returning 31 per cent for the period and yielding 4.4 per cent. Rounding off the top three is 4.3 per cent yielding RBS Equity Income which has returned 23 per cent in the past year.

Also included among the top players are Royal London UK Equity Income and Cazenove UK Equity Income – each has notched up a 28 per cent return. The highest yielding fund on the list is the PFS Chelverton UK Equity Income portfolio, with 5.4 per cent, in the past 12 months it has returned 40 per cent.

The Black List

All funds will undergo periods of weakness and the according to Sanlam, the Black List aims not to highlight those experiencing fleeting difficulties, but to alert investors to those which have consistently provided sub-par returns. SWIP UK Income fund seems rooted to the bottom of the Black List and Sanlam recommends investors sell out.

Other funds on the Black list include BlackRock UK Income, F&C UK Equity Income, Neptune Income and GLG UK Income.

 

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