UK Equity Income funds had their largest ever monthly net retail inflow in June with sales of £1.4bn, making this the best selling Investment Management Association (IMA) fund sector in June. This was also more than was taken by UK Equity Income funds in the five previous months of 2014 when there were net retail sales of £1.25bn.
"We expect this was dominated by the launch of Neil Woodford's new fund which raised £1.6bn," say analysts at broker Numis.
"Investor interest in CF Woodford Equity Income Fund (GB00BLRZQ406) has caused a spike in UK Equity Income fund sales," adds Laith Khalaf, senior analyst at Hargreaves Lansdown. "The Woodford effect is a clear example of investors backing a fund manager rather than a particular asset class, or market. Given the direction of markets, it is impossible to predict with any accuracy, this is a pretty sensible way to go about investing."
Meanwhile, IC Top 100 Fund Unicorn UK Income (GB00B00Z1S94) has maintained its position at the top of wealth manager Sanlam Private Investment's White list of favoured funds in the IMA UK Equity Income sector, following a period of strong performance. The fund is the top performing UK equity income fund over five years and third over three years, and yields 4.32 per cent.
Unicorn UK Income's manager, John McClure, died in June. "However, he leaves two highly competent managers in charge," comments Sanlam. "Simon Moon and Fraser Mackersie have learnt 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."
Other funds in the White List include PFS Chelverton UK Equity Income (GB00B1FD6244). The managers of this fund have generated strong returns because of their emphasis on smaller companies with high starting dividends. "At our last meeting, we were pleased to hear that despite strong capital appreciation they maintain an unwavering desire to continue to produce a solid and growing income from their vehicle," says Sanlam.
Read our tip on PFS Chelverton UK Equity Income from IC 3 May 2013
Threadneedle is consistently in the White List with IC tip Threadneedle UK Equity Income (GB0001448900), Threadneedle UK Equity Alpha Income (GB00B12WJY78) and Threadneedle UK Monthly Income (GB0001529568). "Marrying economic analysis with company meetings and research is a skill not all can master, but Leigh Harrison and Richard Colwell obviously can," says Sanlam.
Read our tip on Threadneedle UK Equity Income
Following a strong start to 2014, Sanlam has re-included Fidelity MoneyBuilder Dividend Fund (GB00B3LNGT95) in the White List. "[Fund manager] Michael Clarke has a rather simple investment style, safety of income at a reasonable price," says Sanlam. "For an equity income investor, it is hard to think of a better starting place."
Read our tip on Fidelity Moneybuilder Dividend
Sanlam ranks its White List funds according to seven different criteria, including performance, volatility and the income distributed, with the most recent period of performance receiving a greater weighting. "And we search out those managers who have delivered the highest level of income, the best returns and have done so at a lower volatility than their peers," adds Sanlam. "It is no accident that the average returns and income in the grey and black lists are lower."
It rebalances the list every six months and funds smaller than £20m are excluded.
Sanlam Private Investments White List
| Fund | Net dividend yield 30/06/14 (%) | Net income 5 years to 30/06/14 (£)* | Total return 1 year to 30/06/14 (%)** | Total return 1 year to 30/06/13 (%)** | Total return 1 year to 30/06/12 (%)** | Total return 1 year to 30/06/11 (%)** | Total return 1 year to 30/06/10 (%)** |
| Unicorn UK Income | 3.9 | 32.9 | 20 | 38.5 | -4.6 | 39.9 | 35.6 |
| PFS Chelverton UK Equity Income | 4.6 | 43.8 | 22.5 | 39.8 | -2 | 25.6 | 35.2 |
| Royal London UK Equity Income | 3.7 | 32.2 | 20.1 | 27.8 | 1.5 | 28.1 | 21.9 |
| JOHCM UK Equity income | 3.9 | 32.7 | 16.2 | 30.1 | -1.6 | 28.4 | 23.9 |
| Threadneedle UK Equity Income | 3.9 | 30.6 | 18 | 23.5 | 1.4 | 26.2 | 17.9 |
| Threadneedle UK Equity Alpha Income | 4.2 | 31.9 | 17.8 | 27.9 | 1.7 | 26.2 | 15.1 |
| SLI UK Equity Income Unconstrained | 3.8 | 30.7 | 20.5 | 36.8 | -10.1 | 34.7 | 22.2 |
| Threadneedle UK Monthly Income | 3.8 | 29.2 | 15.8 | 19.1 | 1.7 | 24.6 | 19.6 |
| Schroder UK Alpha Income | 3.9 | 29.7 | 12.7 | 27.6 | 4.7 | 26.5 | 20.7 |
| Rathbone Income | 3.6 | 29.3 | 12.6 | 25.4 | 2.7 | 21.7 | 20 |
| RBS Equity Income | 3.8 | 29.8 | 12.2 | 22.1 | 2.1 | 25.5 | 21.7 |
| Fidelity MoneyBuilder Dividend | 4.1 | 30.4 | 13.8 | 19.2 | 7.3 | 19.5 | 18.9 |
| Premier Monthly Income | 4.8 | 33.4 | 14.7 | 26.4 | -3.1 | 22.4 | 15 |
| Invesco Perpetual Income & Growth | 3.3 | 26.4 | 14.1 | 20.7 | 4.8 | 20.9 | 20.2 |
| White List Average | 4 | 31.6 | 16.5 | 27.5 | 0.5 | 26.4 | 22 |
Source: Sanlam Private Investments
*Based on £100 investment
**Capital growth and net income reinvested
Not so strong
Sanlam also has a Grey List of funds which can act as an early warning signal for a struggling fund, but also chart the rise of a new star or provide a temporary home for a high quality manager with an out-of-favour style.
Two former White List funds have fallen into this category, Aviva Investors UK Equity Income (GB00B6R52478) and former IC Top 100 Fund Troy Trojan Income (GB00B05K0Q07)."[These funds] sourced the majority of their opportunities in larger capitalisation stocks which have been less in vogue over recent years, hence we have seen them fall away into the Grey List," explains Sanlam.
We dropped Trojan Income Fund when we rebalanced our IC Top 100 Funds last year as it had soft-closed to investors, with a raised minimum investment and an initial charge of 5 per cent. The fund is in the second quartile of the IMA UK Equity Income sector over, one, three and five years.
Two IC Top 100 Funds appear in the Grey List: Fidelity Enhanced Income (GB00B3KB7682) and Schroder Income Maximiser (GB00B0HWJ904). "For this period, it is likely to be the covered call overlay these funds use to enhance their income that has hurt performance," says Paul Surguy, head of managed funds Sanlam Private Investments. "Both were up by around 11 per cent versus an average of 16.5 per cent for the White List funds, and much of this will be due to Astra Zeneca (AZN), where both funds will have been called away.
Perhaps the key to these funds is that investors cannot have both a very high level of income and strong capital growth. By selling covered calls, you are essentially giving away some upside which in a strong market will affect returns, although you do get a higher level of income."
Others Grey List funds include Smith & Williamson UK Equity Income Trust (GB0008178799) which was taken over a year ago by former Newton star Tineke Frikkee, who stopped running Newton Higher Income Fund (GB0006779218) in 2012 after underperforming over one and three years. See our interview with her.
Newton Higher Income remains on Sanlam's Black List of funds. "Newton Higher Income has changed process once in the last 18 months, and managers twice," says Sanlam.
The fund is fourth quartile over one, three and five years in the IMA UK Equity Income sector.
