Top 50 Funds 2022: Equity income

GLOBAL EQUITY INCOME (2 FUNDS)

US-focused and typically lower-yielding than income funds operating in the UK, global options can still offer a good level of diversification and might serve as an interesting core for an income portfolio. Dividend-paying companies can also prove fairly stable in challenging times such as these, and this year’s list includes two names that focus on resilience rather than reaching for the highest possible yield.

Fidelity Global Dividend (GB00B7778087)

A fund with an onus on companies that offer a growing but sustainable dividend and potential for capital growth, Fidelity Global Dividend can seem less exciting than some peers but does come with defensive qualities. It has taken a modest loss in the first eight months of the year, a respectable result in such times. It had 50 holdings at the end of July, and unlike some peers is not too heavily focused on US equities, which made up just under a third of the portfolio. The fund’s big sector calls were in financials, industrials and healthcare. It's historic yield recently stood at 2.8 per cent – fairly decent for a global fund and especially for one with a defensive approach.

New: Guinness Global Equity Income (IE00BVYPNY24)

A fund with an even lower historic yield of 2.3 per cent, this strategy has a total return approach but follows the premise that paying a reliable dividend can indicate a degree of resilience in a company's operations. The managers were invested in just 38 stocks at the end of July, with consumer staples most prominently represented in the portfolio. The fund may have lagged the MSCI World index when markets have been surging, but it has made a modest gain so far in 2022, showing that this portfolio can act as a defensive holding as well as a source of some yield.

UK EQUITY INCOME (4 FUNDS)

An area of focus for many of our readers, UK equity income has been a good port in a storm thanks to the composition of the FTSE 100, while dividends have also made a strong recovery from the dark days of 2020. We have attempted to add slightly more style diversity to the category this time around, and believe a good variety of options are on offer.

Finsbury Growth & Income Trust (FGT)

Although defined as a UK equity income fund by the sector in which it sits, FGT differs from most other income funds. The trust’s shares recently offered a yield of around 2 per cent, a fairly meagre offering in the context of the UK market. But it’s nevertheless a fund that could prove resilient in difficult times, and a “cheap” way to buy into a Nick Train fund while the shares trade on a discount to NAV. As with other Lindsell Train portfolios, it should provide access to some strong brands which can hopefully harness pricing power and take investors through a challenging period. Train's policy of running a portfolio with very few positions – just 22 at last count – means top holdings Relx (RELX), Diageo (DGE), London Stock Exchange, Mondelez (US:MDLZ) and Unilever (ULVR) account for more than half the trust's assets on their own.

It’s worth noting that not all our panellists were fans. QuotedData’s James Carthew argued the trust should be removed, noting: “The manager’s style isn’t suited to current market conditions and it doesn’t yield enough to qualify as an income fund.” We believe it still adds something to the list, although investors should have a clear sense of the reasons for which they hold it.

Diverse Income Trust (DIVI)

A name that has really struggled in the first eight months of 2022, we continue to favour this trust for not just focusing on FTSE 100 companies and instead backing plenty of small- and mid-cap companies. Its focus on stocks further down the market cap spectrum has hurt performance recently, but it does provide some diversification if and when large caps get into trouble. It’s also one way to ease concerns about income concentration – the problem that can emerge when a few big companies pay much of the dividends available in the FTSE 100.

As the investment team recently argued: “Investing across a wider opportunity set offers the potential to access more companies with sustainable income, as well as the potential for dividend growth. In addition, within a larger opportunity set there can be more income-generating companies that have attractive valuations that may have been overlooked.”

There are other tools employed by managers Gervais Williams and Martin Turner: the pair bought a FTSE 100 put option in July 2021 to mitigate against any big falls in the index. While the relative resilience of the large-cap index means that move hasn't paid off so far in this instance, these derivative strategies are one way in which the team can protect investors in extreme times.

Law Debenture Corporation (LWDB)

Its shares may have faltered slightly in recent months but Law Debenture still has plenty to recommend itself. The trust, whose investment managers like to be “moderately contrarian” and pick quality companies when they are out of favour, comes with a yield of around 4 per cent at the time of writing. The portfolio has exposure to some cyclical sectors such as oil and gas and holds many of the large-cap companies associated with a classic UK income approach, but there is one interesting differentiating factor. Beyond its listed equity portfolio, Law Debenture also runs an in-house professional services business, which accounts for around 19 per cent of its NAV. That company should continue to generate decent revenue and, thanks to its outsized dividend contributions, allow the team to avoid picking especially risky stocks in the pursuit of yield.

New: Temple Bar (TMPL)

James Carthew made the case for diversifying the list by replacing Finsbury Growth & Income with a fund that has a distinctive value approach. While we stuck with Finsbury, we agree on the utility of introducing a value stalwart in the form of Temple Bar. Portfolio management was taken over by Redwheel (formerly RWC Partners) in September 2020, and it has fared well under the new team and continues to take a contrarian approach – if perhaps one that is less 'deep value' than that of the old manager, Alastair Mundy of Ninety One.

The fund recently had a fairly chunky exposure to the oil majors, with the team having described such companies as the “new tobacco”, arguing that their resilience is likely underestimated at present. The next biggest sector allocation, to financials, can also be viewed as a textbook value play. In this sense the fund looks well suited to a high-inflation environment, although as noted earlier a recession could cause plenty of difficulties for such a portfolio.

Dropped: Trojan Ethical Income (GB00BYMLFL45)

A fund that has exited the list in favour of a value name, Trojan Ethical Income, tends to have a strong focus on capital preservation. But the claim that sturdy businesses with pricing power will display resilience over the long term could well resonate with investors, meaning this is one fund many might decide to stick with.

REGIONAL EQUITY INCOME (3 FUNDS)

Targeted income plays outside the UK can work well, and in some cases deliver yields comparable to those available in the domestic market. But we have made some changes this year in response to specific concerns raised by the panel.

New: Schroder Asian Income fund (GB00B559X853)

This fund may look familiar, given we have previously backed the closed-ended version run by the same investment team. We have opted for the open-ended equivalent because it gives access to the same process without the performance fee levied by the trust.

The team targets income and capital growth and can build chunky positions in favoured companies, with Taiwan Semiconductor making up 8.6 per cent of the fund at the end of July. The fund's biggest sector allocations are to financials and information technology, with its biggest regional allocations in Australia and Taiwan. The portfolio recently had a very attractive stated dividend of 5 per cent.

New: BlackRock Continental European Income (GB00B43MZ612)

Chopping the size of our top funds list from 100 names to just 50 last year forced us to choose between two European income funds, and this name exited in favour of an investment trust, on the basis that the latter could build up revenue reserves to support future income payments. But some serious concerns about that trust (see below) have arisen since then, prompting us to return to this option.

The fund recently had an attractive trailing yield of 4.4 per cent and, unlike the strategy we have dropped, generates all its income from dividends. It had a relatively concentrated 44 holdings at the time of writing, albeit spread out across some very different sectors, with healthcare and financials being the biggest weightings at the end of July. The fund has struggled so far this year, but otherwise comes with a history of some very admirable annual total returns.

JPMorgan Global Emerging Markets Income Trust (JEMI)

A trust whose shares have struggled lately but comes with a yield of around 4 per cent and an otherwise decent history of performance, this caused no real controversy among the panellists. We would simply note that its income remit will force it to look beyond big tech names in China (for good or ill) – and that it will likely have some common holdings and exposures with the Asian income fund in our list. While both Asia and the emerging markets can offer some attractive yields and some diversification from the UK income space, it’s important to avoid doubling up where possible.

Dropped: Schroder Oriental Income (SOI)

As mentioned, we have dropped this option in favour of the open-ended fund, given the latter’s lack of a performance fee. But investors may well prefer the structural advantages a trust can confer, from revenue reserves to share price discounts and the sometimes larger gains seen when a portfolio is performing well.

Dropped: European Assets Trust (EAT)

This name caused the greatest concern among our panellists, with more than one investment trust specialist worrying about the fact that it can dip into capital to support its dividend payments. An unremarkable feature when performance is good, this can cause real damage when your portfolio is down by a long way and you are effectively crystallising a loss in order to pay income. Analysts worried that the dividend yield was high, and that the payouts themselves were not fully covered. While it could one day recover, this name leaves the list this year, with panellists preferring the “natural income” approach taken by the BlackRock fund, discussed above.