The UK has traditionally been the go-to area for equity income, with the home index offering one of the highest yields. Although this area has had problems over the past decade, there are still good opportunities for funds to home in on. Investment trusts also have the benefit of being able to hold back dividend income in good years, meaning they have reserves that enable them to maintain or even increase dividends in leaner years.
Not all the open-ended funds here are included in the IA UK Equity Income sector. This is because they do not meet its yield requirement of a historic yield on their distributable income in excess of 100 per cent of the FTSE All-Share’s yield at the fund’s year-end on a three-year rolling basis and 90 per cent on an annual basis. But they still have an income objective and, in many cases, provide an attractive and growing income.
TB Evenlode Income (GB00BD0B7D55)
TB Evenlode Income has an outstanding record of outperforming the FTSE All-Share index and IA UK Equity Income sector average, beating these two benchmarks in every full calendar year since its launch in 2009. It has also proved to be relatively defensive, making a positive return every year, including in 2018 and 2011 when the FTSE All-Share index and IA UK Equity Income sector average recorded negative returns.
Although it is not included in the IA UK Equity Income sector it has steadily increased its dividend since launch. Its managers place an emphasis on sustainable dividend growth by investing in companies that make high returns on capital and have strong free cash flow.
“This fund is a solid option in the UK equity income space and, importantly, its manager, Hugh Yarrow, focuses on growing the income over time – rather than potentially sacrificing the longer-term growth for short-term yield,” says Mr Seager-Scott. “The manager takes selected opportunities outside the UK.”
The fund soft closed on 1 May 2018, since when it has charged new investors a 5 per cent initial fee, to stem inflows and prevent it from becoming too large, and to allow its managers to continue investing according to the same strategy. However, investment platforms that sold the fund before this are counted as existing investors, so if you purchase this fund from one of these you will not incur the 5 per cent initial fee. Platforms hosting the fund include Hargreaves Lansdown, Interactive Investor, Bestinvest and AJ Bell Youinvest.
MI Chelverton UK Equity Income (GB00B1FD6467)
MI Chelverton UK Equity Income beats the FTSE All-Share and FTSE 250 indices and the IA UK Equity Income sector average over three, five and 10 years. It has an attractive yield of over 5 per cent, in line with its aim of paying 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 UK equity income funds that focus on larger companies. This means its returns can be fairly volatile from year to year but over the long term it makes very good returns.
Rathbone Income (GB00BHCQNL68)
Rathbone Income makes steady positive returns in most calendar years, and tends to beat the FTSE All-Share Index and the IA UK Equity Income sector average in difficult years so is a good defensive option. Over longer cumulative periods, it outperforms both these benchmarks. It also has an attractive yield of nearly 4 per cent.
“This is a solid core equity income fund run by an extremely experienced and longstanding manager – Carl Stick,” say 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's process is well defined without being overly constrictive, and the heavy emphasis on risk management is particularly pleasing. Carl's focus on companies with high-quality earnings has resulted in this fund having a lower risk profile than the UK stock market. While there are no sector constraints, he controls single-company risk by limiting position sizes.”
The fund’s S share class, which is offered by Hargreaves Lansdown, has a very low ongoing charge of 0.52 per cent.
Finsbury Growth & Income Trust (FGT)
Finsbury Growth & Income Trust is one the best performing UK equity income investment trusts, with returns well ahead of the FTSE All Share index. It has also proved to be a defensive choice, making a negligible loss or a positive return in years when the FTSE All-Share and other equity income funds have fallen, such as in 2018 and 2011.
The trust is run by highly regarded manager Nick Train, who runs a concentrated portfolio with a low turnover. The trust only held 23 stocks at the end of July.
The trust has a relatively low yield of about 1.7 per cent, but it has a progressive dividend policy and, in respect of its last financial year ended 30 September 2018, raised its dividend by 1.1p, or 7.7 per cent, to 15.3p.
Finsbury Growth & Income Trust typically trades at a slight premium to NAV because its board issues shares to prevent it from trading at a significant premium.
The trust had an ongoing charge of 0.67 per cent at the end of its last financial year, which is very reasonable in view of its outstanding performance. And this could become even lower when the trust’s market cap passes £2bn because it has amended its tiered fee structure. In mid August the trust had a market cap of around £1.79bn.
Diverse Income Trust (DIVI)
Diverse Income Trust is different from many UK equity income trusts in that it can invest in companies of all sizes rather than focusing on traditional income-paying large-caps. At the end of July it had 34.8 per cent of its assets in the Alternative Investment Market (Aim), and 16.8 per cent in the FTSE Small Cap and 13.3 per cent in the FTSE 250 indices.
It has an attractive yield of about 4.5 per cent and has made strong long-term NAV returns, although short-term performance has not been as strong. It holds a FTSE 100 put option derivative as an insurance policy against market falls, but this can also detract from performance when the FTSE 100 index is rising, as it did in July.
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 this exposure means that over the long term it could deliver stronger total returns than funds focused on more stable, larger companies.
Diverse Income Trust is run by Gervais Williams, a highly experienced UK smaller companies manager, and Martin Turner.
The trust had an ongoing charge of 1.16 per cent at the end of its last financial year. This could fall as it has cut its management fee from 1 per cent of the market cap up to £3m and 0.8 per cent thereafter, to 0.9 per cent of the market cap up to £300m, 0.8 per cent between £300m and £600m, and 0.7 per cent of the market cap above £600m.
City of London Investment Trust (CTY)
City of London Investment Trust has raised its dividend for 53 years in a row. Its total dividend for its financial year to 30 June 2019 is 18.6p a share, an increase of 5.1 per cent over the previous year. It has a very attractive yield of about 4.7 per cent.
The trust had one of the lowest ongoing charges of all active funds, at 0.41 per cent, at the end of its last financial year. And this could fall further because as of 1 January 2019 it reduced its management fee by about 10 per cent. It has been cut from 0.365 per cent for the first £1bn of net assets and 0.35 per cent for net assets above £1bn, to 0.325 per cent of net assets a year.
“City of London Investment Trust is a core holding for investors seeking income from UK equities,” say analysts at Numis Securities. “Job Curtis has managed the trust since 1991 and his track record over the past 10 years has been strong, with the NAV outperforming the FTSE All-Share – 203 per cent versus 167 per cent.”
The trust has a greater focus on FTSE 100 stocks than many of its equity income peers, so doesn’t always beat the AIC UK Equity Income sector average, in contrast to some sector peers that have a smaller companies focus. However, it has beaten the FTSE All-Share index over the long term and makes positive returns in most calendar years.
Law Debenture Corporation (LWDB)
Law Debenture Corporation used to be ranked in the AIC Global sector, despite the fact it had around 70 per cent of its assets in the UK and its investment policy was to invest between 55 and 80 per cent of its assets in securities listed on the UK market. For this reason, we counted it in our UK equity growth selection of IC Top 100 Funds.
In May, the AIC also moved the trust out of its Global sector – a growth sector – but into its UK Equity Income sector, even though the trust is not changing its longstanding investment strategy or its approach to portfolio construction.
The trust’s board explains: “When the AIC Global sector was first constituted, Law Debenture's composition was more comparable to others in the sector. But by the end of November 2018, the overall UK weighting of the Global sector was around 32 per cent, while Law Debenture's has remained consistent at over 70 per cent. This has meant that Law Debenture's performance characteristics have deviated significantly from the wider sector.
“With a firm focus on both a steadily increasing dividend and long-term capital growth in real terms, an income sector provides a better reflection of the trust's objectives. Our 2018 dividend increased by 9.2 per cent compared with 2017, with the trust delivering annualised dividend growth of 4.5 per cent over the past 10 years. The combination of these two factors, taking into account Law Debenture's long-held UK bias, makes the UK Equity Income sector a more natural home for the trust. And there will be significant advantages in being part of a sector where peer comparisons can more meaningfully be drawn.”
So we are also counting it among our UK equity income fund selection. The trust’s co-manager, James Henderson, is highly experienced and has made very strong returns with the funds he runs. Law Debenture Corporation’s short-term performance can be volatile – a typical characteristic of its manager’s contrarian, value investment style – but has made strong total returns over the long term.
As well as investing in shares and funds, Law Debenture Corporation runs a professional services business that provides administration and governance services – something that differentiates it from other UK investment trusts. The income from this boosts its revenues, enabling it to pay decent dividends, and it has an attractive yield of 3.5 per cent.
The trust’s ongoing charge of 0.43 per cent makes it one of the cheapest active funds available to UK investors.
Edinburgh Investment Trust (EDIN)
Edinburgh Investment Trust’s total returns have not been good over the past few years. This is largely due to underperformance in 2016, 2017, 2018 and so far this year. Before that, the trust was making strong returns. Its manager, Mark Barnett, started running it in 2014, but has a longer historic record of making very strong returns with other funds, including Perpetual Income & Growth Investment Trust (PLI).
“The reason for the underperformance over the past few years is [because the trust] has been overweight defensive sectors – tobacco, healthcare and insurers – with little exposure to resources and none to miners,” according to analysts at Numis Securities. “Mark Barnett has also been unwilling to buy highly rated consumer goods businesses such as Diageo (DGE) and Unilever (ULVR), favouring more cheaply valued domestic stocks. And there have been a number of stock-specific problems over the past three years. But we continue to back Mark Barnett to turn around performance. He has maintained a consistent approach, focused on undervalued businesses with strong balance sheets and disciplined managements that prioritise dividend growth over the long term.”
The trust has increased its dividend every year for 14 years and in mid August had a yield of over 5 per cent. It paid a dividend of 28p a share in respect of its last financial year.
Edinburgh had a low ongoing charge of 0.56 per cent at the end of its last financial year and is the cheapest way to access Mr Barnett’s stockpicking skills.
FUNDS DROPPED
LF Woodford Equity Income (GB00BLRZQB71)
On 3 June LF Woodford Equity Income was suspended from trading due to an increase in the amount of money investors were pulling out of the fund – something virtually unheard of among funds focused on mainstream equities. This means investors cannot withdraw money from it or put money into it.
Investors had become increasingly disillusioned because the fund had underperformed the FTSE All-Share index and the Investment Association (IA) UK Equity Income sector average in 2016, 2017 and 2018, and in 2019 to date. The problem was exacerbated because the fund held a number of unquoted investments, which cannot usually be disposed of as quickly as quoted shares. This meant that the fund’s manager, Neil Woodford, was not able to raise enough money through disposals quickly enough to meet redemptions.
Mr Woodford and his team are now trying to sell all of LF Woodford Equity Income's unquoted holdings and refocus the fund on more liquid FTSE 350 stocks.
It is expected that the fund will remain suspended from trading until December. However, when it does reopen more investors may want to take their money out of it, so its future seems uncertain. And performance has been very poor: the fund has returned -27.91, -32.91 and -11.33 per cent over one, three and five years to 14 August 2019, while the FTSE All-Share index has returned -2.66 per cent, 16.39 per cent and 31.74 per cent, respectively, over those periods.
Lowland Investment Company (LWI)
We have dropped Lowland Investment Company because it shares a number of similarities with Law Debenture Corporation (see above), and the latter seems the better way to access James Henderson’s stockpicking skills. Both trusts are run by James Henderson and Laura Foll, have a focus on UK equities and offer an attractive yield. However, Law Debenture's total returns are much better, its ongoing charge is lower than Lowland’s 0.57 per cent and it is differentiated by its professional services business.
Fund/benchmark | 1yr total return (%) | 3yr cumulative total return (%) | 5yr cumulative total return (%) | Ongoing charge (%) |
Finsbury Growth & Income Trust (FGT) share price | 12.99 | 51.30 | 99.08 | 0.67** |
Edinburgh Investment Trust (EDIN) share price | -16.21 | -13.53 | 9.02 | 0.56** |
City of London Investment Trust (CTY) share price | 1.79 | 14.48 | 32.47 | 0.41** |
Law Debenture Corporation (LWDB) share price | -3.68 | 26.78 | 25.21 | 0.45** |
Diverse Income Trust (DIVI) share price | -12.75 | 5.97 | 26.02 | 1.15** |
Rathbone Income (GB00BHCQNL68) | 0.61 | 14.12 | 35.43 | 0.53* |
TB Evenlode Income (GB00BD0B7D55) | 13.98 | 41.28 | 85.17 | 0.9* |
FTSE All Share index | 0.44 | 20.20 | 31.17 | |
MI Chelverton UK Equity Income (GB00B1FD6467) | -10.47 | 18.48 | 37.19 | 0.86* |
Numis Smaller Companies Excluding Investment Companies index | -7.24 | 16.70 | 31.80 | |
IA UK Equity Income sector average | -3.75 | 10.61 | 24.91 |
Source: FE Analytics as at 31 August 2019, *Morningstar, **AIC. |