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More than half of UK equity income funds have lowest FE Crown rating

30 January 2019

FE Trustnet discovers which Investment Association sectors have the most funds with just one FE Crown.

By Gary Jackson,

Editor, FE Trustnet

The majority of funds in the IA UK Equity Income sector hold the lowest FE Crown rating, while peer groups such as IA Sterling High Yield and IA European Smaller Companies also have a high proportion of poorly rated funds.

FE Trustnet’s analysis of the FE Crown rating shows that 54.3 per cent of IA UK Equity Income members hold a rating of just one crown. In contrast, only 2.5 per cent of the sector have the top rating of five FE Crowns.

The FE Crown ratings aim to help investors identify funds which have displayed superior performance in terms of stockpicking, consistency and risk control over the past three years.

Under the ratings methodology, the top 10 per cent of funds are awarded five FE Crowns, the next 15 per cent receive four crowns and each of the remaining three quartiles are given scores of three, two and one crown respectively.

 

Source: FE Analytics

The FE Crowns have just been rebalanced and the above table shows all the Investment Association sectors that have more than one-quarter of their members with the lowest rating under the crowns system.

It is topped by IA UK Equity Income where 44 of the 81 funds that are eligible for a rating hold only one FE Crown.

The largest IA UK Equity Income fund to hold the lowest rating is HL Multi Manager Income & Growth, which has assets under management of £3bn. The fund, which is managed by Lee Gardhouse and Ellen Powley, has made 22.03 per cent over the past three years, which puts it in the second quartile of the peer group; however, it is in the bottom quartile for annualised volatility.


It’s a fund-of-funds product that counts the likes of Jupiter Income, JO Hambro UK Equity Income and LF Woodford Equity Income among its top holdings.

In a recent update, the managers said: “We think UK equity income funds offer good yields and our combination of more traditional income funds, such as Artemis Income, and more adventurous choices, such as Marlborough Multi Cap Income, has the potential to deliver excellent long-term returns.

“We’re particularly proud of the trust’s track record of generating an attractive income – the income paid has risen in 15 of the 16 years since launch, although income levels are not guaranteed.”

Performance of funds vs sectors and index over 3yrs

 

Source: FE Analytics

Marlborough Multi Cap Income, Standard Life Investments UK Equity Income UnconstrainedRathbone Income and M&G Dividend are some of the other large IA UK Equity Income funds that have an FE Crown rating of one.

It’s also important to note that some former IA UK Equity Income members now reside in the IA UK All Companies sector after failing to meet the former’s yield requirements.

Among those funds, well-known offerings such as Invesco High Income (UK)LF Woodford Equity Income and Invesco Income (UK) have a one FE Crown rating. All three have significantly underperformed the FTSE All Share over the past three years, as well as the average fund in the IA UK All Companies and IA UK Equity Income sectors.

In a recent update, FE Alpha Manager Neil Woodford, head of investment at Woodford Investment Management, said: “Going forward, I expect the investment backdrop to look very different to the one that has prevailed for the last two years. And it is an environment for which I am very confident that the Woodford funds are positioned appropriately.

“We believe the UK economy is capable of continuing to grow by annual rate of 2 per cent or more, irrespective of the outcome of the Brexit negotiations. This is a considerably better outcome than the recession that some of the more pessimistic commentators are forecasting and what is clearly priced in to equity market valuations.

“It will also compare very favourably with most other major economies, many of which are rapidly losing momentum amid increased political risks and tighter monetary policy.”


 

Within the IA UK Equity Income sector, only two funds have five FE Crowns: Schroder Income and Schroder Income Maximiser.

The IA Sterling High Yield sector has the second highest proportion of funds with the lowest FE Crown rating, as half of its members have one crown. This works out as 17 of its 34 members.

Large high yield funds with this rating include Royal London Short Duration Global High Yield BondM&G Global High Yield Bond and Barclays GlobalAccess Global High Yield Bond.

Fidelity Global High Yield is the only five crown-rated member of the IA Sterling High Yield sector.

Performance of funds vs sector over 3yrs

 

Source: FE Analytics

In third place is the IA European Smaller Companies sector, where 42.3 per cent of its 26 members – or 11 funds – hold one FE Crown. This was the worst-performing sector of 2018 after its average member lost 15.52 per cent amid concerns over the health of the European economy.

The largest one-crown fund is Lazard European Smaller Companies, followed by Merian Europe (Ex UK) Smaller CompaniesM&G Pan European Select Smaller Companies and Invesco European Smaller Companies (UK).

MFS Meridian European Smaller Companies and Carmignac Portfolio Euro-Entrepreneurs are the only five FE Crown funds in the IA European Smaller Companies peer group.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.