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Look beyond the big players for equity income gems

Some smaller and less well known funds can also prove to be excellent income options
May 19, 2016

Investors seeking a good UK equity income fund could miss out on some of the best options if they only look to the big names - and this fund sector.

The Investment Association (IA) UK Equity Income sector is dominated by large and well known funds such as CF Woodford Equity Income* (GB00BLRZQ620) which has assets of about £8.8bn, Artemis Income (GB00B2PLJJ36) with £6.58bn and Threadneedle UK Equity Income (GB00B8169Q14) with £3.22bn. These three alone account for about a third of the UK Equity Income sector's total assets.

But wealth manager Tilney Bestinvest points out that there are smaller funds from lesser known houses that may not have big marketing budgets or be household names, but of which the performance has nevertheless been impressive.

"It can be really difficult for small fund groups to get on the radar of private investors, as they don't have access to big marketing budgets and may not be available on the full range of investment platforms," explained Jason Hollands, managing director at Tilney Bestinvest. "Yet some of the best returns can potentially be enjoyed when a fund is smaller in size as its managers have greater flexibility, and rely on their performance numbers to do the talking for them."

Ardevora UK Income (IE00B4XXXL53), Evenlode Income (GB00B40Y5R17) and Unicorn UK Income (GB00B00Z1R87) deserve much greater attention as they have excellent track records and clearly articulated approaches to investment."

It is also worth looking beyond the UK Equity Income sector for equity income funds, as increasing numbers of funds, such as Evenlode Income, are being moved out of this sector because they do not meet the yield level required to be included. UK Equity Income sector funds must achieve a historic yield on their distributable income at their year end more than 10 per cent greater than the FTSE All-Share's yield.

Evenlode Income follows a number of high profile funds in being ejected from this sector, including Rathbone Income* (GB00B3Q9WG18) last month, and Invesco Perpetual High Income (GB00BJ04HQ93), Schroder Income (GB00BDD2DX75), Man GLG UK Income (GB00B0117D35), and Henderson UK Equity Income & Growth (GB0007493470). These funds have been moved into the UK All Companies sector.

But the Investment Association, which ranks funds into sectors, is reviewing its yield requirement rules for UK Equity Income funds and has launched a consultation.

"Having a target is one thing, but I'm of the belief that managers shouldn't be forced to buy certain companies or sectors just to achieve a certain level of yield," said Darius McDermott, managing director at Chelsea Financial Services. "As long as the fund manager is transparent in their aims and process, investors should be allowed to choose whether they want a high yield or a growing yield.

The UK stock market yield is also currently being skewed by some very big dividend payers whose dividend cover is coming under real pressure and which, unless you are a real contrarian manager, you don't necessarily want to own simply because they produce an income."

Evenlode Income's managers run a concentrated portfolio of around 30 cash compounding companies - quality businesses that are able to generate high returns on capital with strong free cash-flow - without the need for debt. These are typically large and mid-sized UK-listed companies, that currently include Unilever (ULVR), Diageo (DGE) and GlaxoSmithKline (GSK).

"This £524m fund has been a very consistent performer, beating the FTSE All-Share Index in each of the last five years and over this period trouncing the FTSE All-Share by 40 per cent, to deliver a total return of 72 per cent," says Mr Hollands.

 

*IC Top 100 Fund

Fund12-month yield (%)IA sector1-year total return (%)3-year cumulative total return (%) 5-year cumulative total return (%) 10-year cumulative total return (%) Fund size (£)
CF Woodford Equity Income C GBP Inc4.11UK Equity Income-0.2nanana8.77bn
Artemis Income I Inc4.3UK Equity Income-5.213.949.391.76.6bn
Threadneedle UK Eq Inc ZNI4.59UK Equity Income-2.722.960.1113.43.22bn
Ardevora UK Income C4.71UK Equity Income-2.523.9nana206.78m
Evenlode Income B Inc3.47UK Equity Income3.528.172.1na523.77m
Unicorn UK Income B Inc4.72UK Equity Income-1.030.177.5170.2695.06m
Rathbone Income I Acc3.88UK All Companies-1.121.462.171.91.22bn
Invesco Perpetual High Income Inc*3.63UK All Companies-4.121.059.4114.511.56bn
Schroder Income Inc*4.73UK All Companies-11.49.443.292.21.38bn
Man GLG UK Income Professional Inc D4.92UK Equity Income-2.223.844.943.9108.14m
Henderson UK Equity Inc & Gr I Inc4.22UK All Companies-5.120.961.998.2467.05m
IA UK Equity Income sector average-4.615.744.661.1
FTSE All Share TR GBP-7.16.032.366.4

Source: Morningstar

Performance data as at 17 May 2016

*Performance of an older share class rather than one indicated in text