Open-ended UK Equity Income funds are suffering from FTSE 100 dividend cuts, but are managing to maintain their payouts due to increased payouts from FTSE 250 stocks, according to the latest income report from wealth manager Sanlam.
The twice-yearly study reveals that despite cuts by FTSE 100 giants Anglo American (AAL) and Glencore (GLEN), the Investment Association (IA) UK Equity Income sector still outperformed both the UK equity market and UK Equity All Companies sector in 2015.
Among the 14 funds which make Sanlam's favoured list of equity income funds are IC Top 100 Fund PFS Chelverton UK Equity Income (GB00B1Y9J570) and Unicorn UK Income (GB00B00Z1R87), which has taken the top spot from PFS Chelverton.
Both funds have a focus on small- and mid-sized companies which has helped them boost returns throughout 2015. According to Unicorn, the fund runs a "concentrated portfolio of up to 50 stocks with a small- to mid-cap bias" and focuses on companies with the potential for dividend growth.
Also see our recent interview with the managers of Unicorn UK Income.
PFS Chelverton screens all small- and mid-caps above £50m and invests only in stocks yielding at least 4 per cent on a 12-month view. The fund is able to add to stocks until the yield falls to 3 per cent following share price appreciation, but sells companies if they fall to a yield of 2 per cent.
Sanlam ranks its funds according to seven different criteria based on performance, volatility and income distributed. So although Evenlode Income (GB00B40Y5R17) performed well in the second half of the year, it was prevented from climbing higher in the list due to its relatively low income payouts.
The White List funds have had to look to new sectors of the market for income. In the third quarter of 2015, dividend growth among mid-sized FTSE 250 companies outstripped FTSE 100 stocks, increasing payouts by 30 per cent. The origin of the best income changed too, with commodity companies slashing their investor income, but banks increasing their contribution.
In terms of funds falling out of the White List, Old Mutual UK Equity Income Fund (GB00B1XG7551) suffered the worst re-rating moving down to the bottom half of Sanlam's Grey list, which the company describes as "a temporary home for a manager with an out-of-favour style or early warning signal for a fund in decline".
"The concentrated portfolio experienced its first poor year since 2011," explained Sanlam.
In 2015, Old Mutual UK Equity Income underperformed its sector, putting it in the fourth quartile in terms of performance. Scottish Widows UK Equity Income (GB0031643348) came last again, having failed to beat its peers in return terms and also delivering one of the lowest net incomes over a five-year period with higher volatility.
White List performance
Total return capital growth and net income reinvested | ||||||
|---|---|---|---|---|---|---|
| Fund | Net dividend yield | 31/12/14 to 31/12/15 | 31/12/13 to 31/12/14 | 31/12/12 to 31/12/13 | 31/12/11 to 31/12/12 | 31/12/10 to 31/12/11 |
| Unicorn UK Income | 3.5 | 13.3 | -2.4 | 40 | 33.3 | -5 |
| PFS Chelverton UK Equity Income | 4.6 | 16 | 0.3 | 41.4 | 29.3 | -7 |
| Premier Monthly Income | 4.4 | 8.7 | 2.5 | 29 | 11 | 2.5 |
| Fidelity MoneyBuilder Dividend | 4.1 | 7.1 | 6.9 | 21.9 | 10.4 | 7.5 |
| Troy Trojan Income | 3.8 | 10.2 | 9.4 | 19.5 | 9.3 | 5.7 |
| Rathbone Income | 3.7 | 8.5 | 6.1 | 23.9 | 14.9 | -0.2 |
| Evenlode Income | 3.9 | 7.9 | 7.7 | 26 | 12 | 1.4 |
| Threadneedle UK Monthly Income | 4 | 6.9 | 5.5 | 27.4 | 10.9 | 2.7 |
| Premier Income | 4.5 | 9.2 | 1.7 | 31.2 | 9.4 | 1.5 |
| Royal London UK Equity Income | 4.1 | 4.8 | 6.3 | 34.1 | 20.7 | -1.9 |
| SLI UK Equity Income Unconstrained | 3.6 | 11.4 | 6.4 | 37.2 | 23.1 | -9.7 |
| Miton Income | 4.2 | 10.96 | 4.2 | 20.4 | 6.9 | 3.7 |
| Threadneedle UK Equity Alpha Income | 4.5 | 2 | 5.6 | 30 | 18.3 | 1.4 |
| Santader Equity Income | 4.7 | 12.5 | 4.8 | 18.7 | 8.8 | 2.5 |
Source: Sanlam
