Top 100 Funds: UK Equity income (9 Funds)

TB Evenlode Income (GB00BD0B7D55)

Evenlode Income has beaten the FTSE All-Share index and IA UK Equity Income sector average by quite a margin over one, three and five years. Although it is not included in the IA UK Equity Income sector, it has a yield of over 3 per cent and has steadily increased its dividend since launch. Its managers place an emphasis on sustainable dividend growth by investing in companies with high returns on capital and strong free cash flow.

The fund soft closed on 1 May and since then has charged new investors a 5 per cent initial fee. This is because it had reached about £2bn in size and its managers wanted to stem inflows to “prioritise and maintain relationships with our existing investors, while managing the assets already entrusted to us most effectively, staying true to our investment strategy and process”.

However, investment platforms that already sold the fund are counted as existing investors, and are not charged an initial fee. So, if you make a new investment in this fund, as long as you purchase it from one of these platforms, you will not incur the 5 per cent initial fee. Platforms hosting the fund include Hargreaves Lansdown and Bestinvest (click for more platforms which offer the fund).

MI Chelverton UK Equity Income (GB00B1FD6467)

MI Chelverton UK Equity Income beats indices such as the FTSE All-Share and is one of the top-performing funds in the IA UK Equity Income sector over one, three and five years. It has an attractive yield of over 4 per cent, in line with its aim of a high and growing quarterly dividend, and the prospect of good long-term capital growth.

It mainly invests in mid-cap companies, so it provides a different exposure to some UK equity income funds focused on larger companies.

LF Woodford Equity Income (GB00BLRZQB71)

LF Woodford Equity Income is run by Neil Woodford, one of the most high-profile UK equities managers, who over his long career has performed very strongly, most notably while he ran the Invesco Perpetual Income (GB00BJ04HX60) and High Income (GB00BJ04HQ93) funds. However, for over two years LF Woodford Equity Income has been underperforming the FTSE All-Share index and the IA UK Equity Income sector average, and many of the panel favour removing it.

But the fund had a very good 2015 – things started to go badly after that so the poor performance has been for less than three years. This is too short a period over which to judge an equity investment as these can deliver good returns over the long term but experience periods of volatility.

All managers have periods of poor performance, including Mr Woodford, who has always bounced back. Mr Woodford takes significant stock or sector bets, so his funds can perform quite differently to major indices. At the end of July, for example, LF Woodford Equity Income had no exposure to oil & gas and mining. And his defensive style has meant his funds have been less impacted in down markets, such as the 2008 financial crisis, but can lag rapidly rising markets.

In the meantime, the fund is paying dividends and has a yield of about 3.5 per cent. It also has a relatively low ongoing charge for an active fund.

This is not an option for low-risk investors, especially as the fund has a portion of its assets in unquoted companies. But for long-term contrarian investors, in time it could prove to have been worth the wait.

Rathbone Income (GB00BHCQNL68)

Rathbone Income makes steady positive returns in most years, and beats the FTSE All-Share Index and the IA UK Equity Income sector average over longer periods. It has a yield of about 3.8 per cent.

“This is a solid core income fund run by an extremely experienced and longstanding manager,” comment analysts at FundCalibre. “It has one of the best track records in the sector for raising dividends annually over a period of more than 20 years. Carl Stick’s process is well defined without being overly constrictive, and the heavy emphasis on risk management is particularly pleasing.”

The fund can be bought for as little as 0.53 per cent, depending on which share class your platform offers. And its ongoing charge could fall because Rathbone Unit Trust Management is proposing to merge Rathbone Blue Chip Income and Growth Fund (GB00B7FN6N73) into Rathbone Income. The latter fund only has assets of about £58m but if these are absorbed by Rathbone Income making it larger, its costs will be spread over more investors and each investor’s costs should decrease.

If Rathbone Blue Chip Income and Growth investors approve the merger it should take place within a matter of weeks (on 5 October). Mr Stick would continue to run Rathbone Income, and Alan Dobbie, current manager of Rathbone Blue Chip Income and Growth, would become a co-manager.

Rathbone Unit Trust Management would bear the costs of the merger.

Finsbury Growth & Income Trust (FGT)

Finsbury Growth & Income Trust has an outstanding performance record and its total returns are far ahead of the FTSE All-Share index and AIC UK Equity Income sector average over one, three and five years. The trust is run by highly regarded manager Nick Train, who runs a concentrated portfolio of up to 30 stocks with a low turnover.

The trust has a relatively low yield of about 1.7 per cent, but it has a progressive dividend policy and, for example, in its last financial year ended 30 September 2017 raised its dividend by 8.4 per cent to 14.2p.

Finsbury Growth & Income Trust’s board uses share buybacks to try to prevent it from trading at a discount to NAV of more than 5 per cent, and share issues at a 0.7 per cent premium to NAV to prevent it from trading at a significant premium. The trust typically trades at a slight premium to NAV.

“This is a very strong performer with a distinct quality style,” says Ewan Lovett-Turner at Numis Securities. “Nick Train’s investment process involves building a concentrated portfolio of quality companies that have strong brands and powerful market franchises. This leads to very different sector weightings from the FTSE All-Share, with a heavy emphasis on branded consumer goods and financial services.”

The trust has an ongoing charge of 0.71 per cent, which in view of the outstanding performance is very reasonable.

Diverse Income Trust (DIVI)

Diverse Income Trust is different to many UK equity income trusts in that it can invest in companies of all sizes, rather than focusing on traditional income-paying large-caps. For example, at the end of July it had about 35 per cent of its assets in the Alternative Investment Market (Aim) and 16 per cent in the FTSE Small Cap and 12 per cent in the FTSE 250 indices.

It has a strong performance record and has beaten the FTSE All-Share index in all but one full calendar year since its launch in 2011.

The trust has grown its dividend every year since launch and each annual dividend has been fully covered by revenue. It has also built up a revenue reserve of £16.6m, which is worth more than the dividend it paid in its last financial year. It has a yield of about 3 per cent.

Diverse Income Trust is run by highly experienced UK smaller companies manager Gervais Williams and Martin Turner.

Its exposure to Aim and smaller companies means it is higher risk and potentially more volatile than traditional equity income funds focused on stable large-caps. But over the long term it could deliver stronger total returns and it holds a FTSE 100 put option derivative as an insurance policy against market falls.

Edinburgh Investment Trust (EDIN)

Edinburgh Investment Trust hasn’t had a great 2016 or 2017 relative to the FTSE All-Share index. However, its manager, Mark Barnett, who started running the trust in January 2014, has a very strong long-term track record with other funds such as Perpetual Income & Growth Investment Trust (PLI).

Edinburgh bears little resemblance to the FTSE All-Share, being overweight specialist financials, tobacco and pharmaceuticals. And it has significant exposure to small and mid-caps. Mr Barnett takes a high-conviction, fundamental approach that tends to result in a concentrated number of holdings and sectors. This approach has delivered significant outperformance over the medium to long term, but can also mean periods of underperformance.

“Mark has a valuation-driven approach focused on stockpicking within a top-down macro framework,” comment analysts at Numis Securities. “The dull performance over the past two years has seen Edinburgh’s discount to NAV widen, which offers value. It is always tempting to react to a period of underperformance by selling. However, we retain faith that the team’s relative performance will improve. At a time when market valuations appear full, we favour buying funds with experienced active managers taking a long-term investment approach, rather than those focused on relative index weightings.”

In the meantime, the trust is paying dividends, which it has increased every year for 13 years, and paid out 26.6p in its last financial year.

Edinburgh is the cheapest way to access Mr Barnett, with an ongoing charge of only 0.55 per cent.

City of London Investment Trust (CTY)

City of London Investment Trust had beaten the FTSE All-Share index every calendar year between 2010 and 2015 but lagged in the past two, so its cumulative total returns don’t look so good and are behind those of its peer group average. This is partly because it is underweight oil and mining shares relative to the index.

The trust also doesn’t always beat its sector average because it typically has at least 60 per cent of its assets in FTSE 100 companies, in contrast to some sector peers that have a smaller companies focus.

However, the trust has increased its dividend every year for 51 years, and its board said in February that its diverse portfolio, strong cash flow and revenue reserves mean it is likely to do this for a 52nd year. In its last financial year it paid a dividend of 16.7p a share, up 5 per cent from 15.9p the year before.

The trust has been run by Job Curtis since 1991, who mainly invests in cash-generative businesses that can grow their dividends with attractive yields. The trust often trades at a premium to NAV because of its income profile but carries out regular share issues to try to keep this in check.

It has one of the lowest ongoing charges of all active funds at 0.42 per cent.

Lowland Investment Company (LWI)

Lowland Investment Company makes strong long-term returns but over shorter periods can be very volatile – a typical characteristic of co-manager James Henderson’s approach. So, for example, while it outperformed the FTSE All-Share index and peer group average in 2017, so far this year it’s only in line with the index.

The trust doesn’t have a formal discount control policy, so its share price does not always keep up with its NAV returns, leading it to trade at a discount to NAV. Such moments could be a good opportunity to buy it as it has traded at a premium when it has been outperforming.

Although it has a performance fee there is a cap on this, so the maximum fees payable are 0.75 per cent a year on the first £375m of net chargeable assets and 0.65 per cent a year on those in excess of that. So, even in periods of stronger performance, the ongoing charge plus performance fee shouldn’t be much more than the 0.68 per cent it reached at the end of the trust’s last financial year.

Lowland Investment Company has a yield of around 3.4 per cent and has increased its dividend every year since 1975, except in 2009 when it was held at 26.5p. The trust’s board hopes to pay a total dividend in its current financial year of 53p, up 8.3 per cent on the 49p it paid last year.