Buy into Franklin UK Equity Income's low-fee performance boost

Research has shown that low costs are one of the strongest predictors of a fund's outperformance as low fees eat less into investor returns. "The magnitude of the [fee] reduction now sets this fund apart from its peers in terms of costs," says Samuel Meakin, research analyst at Morningstar. "We have long highlighted the predictive power of fund fees and their impact on performance outcomes, with our studies demonstrating how dependable fees are as a predictor of future success. This move serves to increase our conviction in the longer-term prospects of the Franklin UK Equity Income fund, given the tailwind that a reduction in fees will provide to investor net returns going forward."

Franklin UK Equity Income has already delivered top-quartile performance over one and three years, making it a good option for both growth and income investors.

The fund has delivered a return of 19.6 per cent over one year and 37.9 per cent over the past three years compared with a return of 12.4 per cent and 21.1 per cent, respectively, by the FTSE All-Share Index. It also has an attractive 12-month yield of 5.69 per cent.

The fund has been managed by Colin Morton since January 1995, who has been assisted by Ben Russon and Mark Hall since 2013. Mr Morton has demonstrated sustained stockpicking skill and an ability to beat the market over the long term in both rising and falling environments. According to FE Trustnet data, Mr Morton delivered a cumulative total return of 109.1 per cent over 10 years, compared with 68.5 per cent generated by a composite of his peer group.

The fund aims to provide a growing level of income that is higher than that of the FTSE All-Share Index, together with capital growth over a medium- to long-term horizon of between three and five years.

Mr Morton blends top-down analysis of the UK economy and stock market dynamics with a valuation-aware approach to stock selection. He favours large companies that have strong and growing free cash flows, competitive positions in their industries, and attractive dividend yields and/or dividend growth.

Higher-yielding funds' managers maybe putting more money into riskier stocks, which could cut their dividends. This fund does have exposure in its top 10 holdings to companies over which some investors are concerned regarding the dividends, such as Diageo (DGE).

And with more than 70 per cent of the portfolio in mega- and large-cap companies, the fund is likely to underperform in smaller-cap led markets.

However, some analysts consider that the fund is on the lower end of the risk scale, with FE Trustnet giving it a risk score that is less than holding the FTSE 100 index. And its large-cap focus has proved beneficial following the vote for Brexit, which saw large, internationally focused companies with high earnings outside the UK perform well.

So, with low fees, an attractive yield and solid performance record, Franklin UK Equity Income Fund could be a good move for growth and income investors. Buy. EA

Source: Morningstar, as at 30/08/16, *Following the fund's relaunch as an Oeic, to receive the assets of the Rensburg UK Equity Income Trust which had been running since 1995.

Performance

Source: Morningstar, as at 13 June 2016

Top 10 holdings as at 31 July 2016 (%)

Source: Franklin Templeton

Sector breakdown (%)