Best UK income funds have small-cap flavour

CF Miton UK Multi Cap Income fund, held on to pole position as the best income fund on the White List, having also come out on top in Sanlam's last study, published in February 2017. The fund's portfolio has 35 per cent in Aim-traded stocks, 18 per cent in the FTSE 250 and 14 per cent in the FTSE Small Cap.

Other small- and mid-cap weighted funds also rose through the ranks significantly. Slater Income Fund (GB00B905XJ71), managed by Mark Slater, rose from sixth position in February to second position. According to Morningstar its portfolio has 31 per cent in small-cap companies and 26 per cent in micro-caps. MI Chelverton UK Equity Income Fund (GB00B1FD6467), managed by David Taylor and David Horner, rose from bottom of the White List in January to take third place. It has 48 per cent in small-cap companies and 26 per cent in micro-caps.

Jason Hollands, managing director of Tilney Group, said: "Smaller companies and mid-caps are parts of the market that have performed particularly well in recent times. In the case of smaller companies, which are often considered to be 'risky', volatility has actually been lower than the FTSE 100, which has been impacted in particular by the presence of oil and gas majors and mining companies. 

"There are very good reasons to diversify an income portfolio beyond the usual FTSE 100 names that most equity income funds cluster around. Payout ratios in many of those businesses are already incredibly high, with 89 per cent of earnings distributed last year, and that leaves limited headroom for further dividend growth."

The biggest faller in the study was Newton UK Income Fund (GB00B7W2G379), which has almost 60 per cent of its assets in giant companies and 23 per cent in large-cap companies. The £1.7bn fund fell from the Grey to the Black List – the collection of funds with the most consistent underperformance between the February and August study.

"The fund also had exposure to healthcare, utilities and telecoms, all of which have been a drag on performance over the past 12 months," said Adrian Lowcock, investment director at Architas.

Sanlam's study is published twice a year and ranks Investment Association (IA) UK equity income funds’ performance on seven different criteria including: absolute income generated over the past five calendar years; capital growth for each of the past five 12-month periods and volatility over the past five years. The past 12 months of performance receive a greater weighting and funds with a value of less than £20m are excluded.

Funds on the White list demonstrated superior total returns while the Black List reveals consistent underperformers. In between these, the Grey List can indicate a temporary period of poor performance due to an out-of-favour investment style or an early warning signal of a fund’s decline.

In this update previous White List funds, Schroder Income Maximiser (GB00BDD2F083), Threadneedle UK Equity Alpha Income Fund (GB00B88P6D76), Franklin UK Equity Income Fund (GB00B7MKLS14) and RBS Equity Income (GB0033517276), fell into the Grey List.

The White List