Skip to the content

The minnow UK income funds quietly beating their larger peers

02 August 2017

In the next instalment of its series, FE Trustnet looks at the smallest funds in the IA UK Equity Income sector boasting greater alpha generation and stronger returns than many of the more well-known funds.

By Lauren Mason,

Senior reporter, FE Trustnet

AXA Framlington Monthly Income, Ardevora UK Income and Premier Monthly Income are among some of the smallest funds in the IA UK Equity Income sector to have generated the most alpha for investors over the last five years, according to research from FE Trustnet.

This comes as part of a series, which aims to shine the spotlight on top-performing funds that may be lurking in the shadows of some of their larger peers in the sector.

While we looked at the smallest UK growth funds packing the biggest punch last week, we have now moved onto the IA UK Equity Income sector.

In order to filter through the best ‘minnow funds’, we looked at all vehicles with five-year track records which are in the top 25 per cent in the sector for their five-year alpha generation and total return, the top 50 per cent for their maximum drawdown but are in the bottom quartile for their fund size.

While just one fund passed the test – Premier Optimum Income – a further three funds (all of which are still under £300m in size) have achieved a top-quartile alpha generation and total return over five years, are in the top 50 per cent for their drawdowns and are in the bottom 50 per cent for their assets under management.

 

Source: FE Analytics

The £90m Premier Optimum Income fund has been headed up by Chris White since 2008 and aims to provide quarterly income pay-outs while growing the value of investors’ capital over the long term.

Aside from its portfolio of stocks, the fund uses derivatives to generate extra income in exchange for potential capital gains. Examples of its largest individual holdings include the likes of Lloyds Banking at 5.3 per cent, Legal & General at 5 per cent and Aberdeen Asset Management at 4.6 per cent. In fact, 43 per cent of the overall portfolio is in financial stocks.

Over five years, the fund has outperformed its average peer and the FTSE All Share (investors should note the fund isn’t benchmarked against an index) by 18.36 and 25.76 percentage points respectively with a total return of 90.72 per cent. It has done so with an alpha generation – which measures over- or underperformance in addition to a benchmark – of 1.26 as well as a second-quartile maximum drawdown – which measures the most money lost if bought and sold at the worst times – of 8.6 per cent.

Investors should note that, when it comes to alpha generation, a score of 1.26 means the fund would have achieved an excess 1.26 per cent return when the FTSE All Share is presumed to have returned zero over the given time frame.

Had an investor placed an initial £10,000 into the fund five years ago, they would have received £4,461.61 in income alone.

Premier Optimum Income has a clean ongoing charges figure (OCF) of 1.03 per cent and yields 6.89 per cent.


The fund on the extended list with the highest five-year alpha generation at 4.82 per cent is AXA Framlington Monthly Income, which has five FE crowns and is headed up by George Luckraft.

The £260m fund adopts a multi-cap approach to investing; it has just 34 per cent in FTSE 100 stocks but has 27 per cent in AIM constituents, 18.69 per cent in small-caps and 1.26 per cent in mid caps.

Luckraft aims to provide monthly income with the potential for long-term capital growth. Examples of some of the largest holdings in the 88-stock portfolio include Royal Dutch Shell, British American Tobacco and HSBC Holdings.

Over five years, the fund returned 90.24 per cent compared to its FTSE All Share benchmark and average peer’s respective returns of 64.98 and 70.3 per cent. It has done so with the lowest drawdown of all funds to have made it through our filters at just 5.77 per cent (the FTSE All Share’s five-year maximum drawdown is 11.12 per cent).

Performance of fund vs sector and benchmark over 5yrs

 

Source: FE Analytics

Had an investor placed an initial £10,000 into the fund five years, ago, they would have received £2,905.37 in income alone.

AXA Framlington monthly income has a clean OCF of 0.84 per cent and yields 4.36 per cent.

The only other fund on the list to pay a monthly stream of income is Premier Monthly Income, which is £237m in size, has a five-year alpha generation of 0.95 and has a five-year maximum drawdown of 8.6 per cent.

Over five years, it has outperformed its average peer and benchmark by 13.38 and 18.7 percentage points respectively with a total return of 83.68 per cent. Based on a £10,000 investment five years ago, it would have paid investors £3,039.83 in income alone.

Manager Chris White (who differs from Premier's aforementioned Chris White) adopts a similar approach to portfolio construction, except without the use of derivatives. He aims to provide a ‘reasonable’ level of income which grows over time, alongside some capital appreciation. Examples of its largest holdings include HSBC, Lloyds Banking Group and Royal Dutch Shell.

The fund has a clean OCF of 0.92 per cent and yields 4.16 per cent.


The final fund on our list is for its small size and significant alpha generation is Ardevora UK Income, which has an AUM of £138m and is headed up by FE Alpha Manager duo Jeremy Lang and William Pattisson.

It has generated alpha relative to the FTSE All Share of 1.42 and, also over five years, has comfortably outperformed its average peer and benchmark with a total return of 90.55 per cent; it has done so with a 7.18 per cent maximum drawdown.

Performance of fund vs sector and benchmark over 5yrs

 

Source: FE Analytics

Lang and Pattisson adopt a fairly unusual approach to portfolio construction, whereby they actively avoid meeting with the management teams of companies so as not to invest emotionally.

They instead select companies based on stock prices, valuations, forecasts and analyst reports. The managers also select stocks based on where they believe ‘the market’ is wrong.

For instance, within management teams they look for hubris and excessive risk-taking, among analysts they look for signs of overconfidence and blinkering while, with investors, they look for excessive anxiety or a fixation on recent emotive events.

This results in a concentrated portfolio of 41 large- and mid-cap stocks; Ardevora UK Income holds approximately 59 per cent in large caps, 24 per cent in mega caps and 16 per cent in mid caps. Its largest individual weightings include Royal Dutch Shell, BP and GlaxoSmithKline.

Had an investor placed an initial £10,000 into the fund five years ago, they would have received £2,898.32 in income alone.

The fund has a clean OCF of 0.86 per cent and yields 4 per cent.

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

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.