The average fund in the IA UK Equity Income sector has built up a decent track record in outperforming the FTSE All Share if held for five years or more, but research by FE Trustnet shows that some members have never lagged the index over this time frame.
Over the 51 quarterly five-year periods that span the start of 2000 through to the end of June 2017, the average IA UK Equity Income member beat the FTSE All Share index 53 per cent of the time.
Performance of sector vs index over rolling 5yr periods
Source: FE Analytics
In doing this, the sector has established a stronger track record than the IA UK All Companies peer group, where the average fund has outperformed the index in only 39 per of the rolling five-year periods examined.
It is, however, behind the average IA UK Smaller Companies fund – which is the best relative outperformer after beating the FTSE Small Cap (ex IT) in 78 per cent of the 51 five-year periods.
Over the following article, we will take a closer look at five IA UK Equity Income funds (that have a track record covering at least 26 of the 51 periods) that have consistently beaten the FTSE All Share for investors holding them for five years.
Liontrust Macro Equity Income
Performance of fund vs sector and index over rolling 5yr periods
Source: FE Analytics
In fifth place is the £299m Liontrust Macro Equity Income fund, which is run by FE Alpha Manager Stephen Baily and Jamie Clark. The fund was launched towards the end of 2003, so has a track record for 35 of the 51 periods we looked at. It has beaten the FTSE All Share in 34 – or 97 per cent – of these five-year periods. Its largest outperformance was 20.18 percentage points over the index and it lagged by 2.99 per cent in the one period it underperformed. The portfolio is managed using Liontrust’s Macro-Thematic process, which revolves around the identification and interpretation of major economic, political, social and cultural developments affecting the UK and the rest of the world. This top-down approach can lead to a portfolio that looks different to the market – the fund has a large overweight to telecommunications at the moment while it is underweight industrials and consumer services. Liontrust Macro Equity Income has an ongoing charges figure of 0.88 per cent and is yielding 4.69 per cent.
Artemis Income
Performance of fund vs sector and index over rolling 5yr periods
Source: FE Analytics
The £6.4bn Artemis Income fund is one of the best-known members of the IA UK Equity Income sector and comes next in our research, after beating the FTSE All Share in 48 of the 49 five-year periods it has a track record for; that means it outperformed the index in 98 per cent of the periods. Its strongest period of five-year outperformance saw it top the index by 82.63 percentage points while it was behind by just 33 basis points in the single period of underperformance. The fund is managed by Adrian Frost and Nick Shenton although longstanding co-manager Adrian Gosden departed around a year ago. The process behind the fund focuses on free cash flow generation, which the managers believe leads them towards more robust companies. Frost and Shenton also think that the market has become too pessimistic about the UK’s dividend payers, saying: “The UK market is viewed by some as containing a disproportionate amount of dividend risk, particularly among FTSE 100 companies. We would draw attention to recent dividend increases from Rio Tinto and Direct Line; while some dividend-payers may be at risk of falling from their perches, other are climbing back on.” Artemis Income has a 0.79 per cent OCF and is yielding 3.84 per cent.
Schroder UK Alpha Income
Performance of fund vs sector and index over rolling 5yr periods
Source: FE Analytics
The first of the funds that have beaten the FTSE All Share in 100 per cent of the rolling five-year periods is Matt Hudson’s £456.8m Schroder UK Alpha Income fund; it has a track record spanning 29 of the 51 periods we examined. Its most significant outperformance of the index was 52.23 percentage points and the smallest was just 23 basis points. Hudson’s approach centres on the business cycle, with the portfolio reflecting whether the cycle is in recovery, expansion, slowdown or recession. This means the portfolio will tend to be titled towards cyclicals in the early recovery part of the cycle then shift more towards defensives as the economy starts to slow down. At the moment, the fund’s biggest overweights are to financials and industrials while oil & gas majors Royal Dutch Shell and BP are its largest two holdings. Schroder UK Alpha Income has a 0.91 per cent OCF and yields 4.53 per cent.
JOHCM UK Equity Income
Performance of fund vs sector and index over rolling 5yr periods
Source: FE Analytics
In second place is the £3.3bn JOHCM UK Equity Income fund, which has outperformed the FTSE All Share in all of the 31 rolling five-year periods of its track record. Its strongest five-year outperformance was 69.74 percentage points above the index while its weakest was still 3.72 percentage points over. Managed by Clive Beagles and James Lowen since launch, the fund is run with a contrarian style that focuses on companies with reasonable growth prospects and an above-market dividend yield. One of the key elements of the process is that stocks will be sold if they rise in value to the point where their yield drops to below that of the FTSE All Share. The portfolio’s biggest active bets at the moment are Aviva, Rio Tinto and BP. Beagles and Lowen are cautious that ultra-loose monetary has made many assets expensive. In their latest update, the managers said: “An element of caution may be appropriate as we approach the autumn. Within the equity markets, we strongly believe that this overvaluation is most apparent in consumer staples and other perceived defensive sectors such as utilities and pharmaceuticals. Conversely, we believe that many of the areas that we are exposed to will respond well to a change of stock market leadership, particularly financials.” JOHCM UK Equity Income, which is soft-closed, has a 0.80 per cent OCF (plus a performance fee) and is yielding 4.29 per cent.
Aviva Investors UK Equity Income
Performance of fund vs sector and index over rolling 5yr periods
Source: FE Analytics
In first place after outperforming in every one of the 51 rolling five-year periods reviewed in this study is the £966m Aviva Investors UK Equity Income fund, which is managed by Chris Murphy and James Balfour. It outperformed the FTSE All Share by 31.2 percentage points in its strongest five-year period and by 2.54 percentage points in its weakest. Murphy’s whole investment philosophy is based on the idea that many investors are habitually driven by fear and greed, while he looks for a more mundane approach. The process behind the fund concentrates on how companies make use of cash, with the managers favouring ‘cash compounders’ – or businesses with impressive returns on investment and stable cash flows. Top holdings at present include Unilever, Royal Dutch Shell and GlaxoSmithKline. Square Mile Investment Consulting & Research, which gives the fund an ‘A’ rating, said: “We view this fund is a solid offering within the UK equity income space and although its more naturally defensive profile may cause it to lag peers during strong momentum led markets, it should prove more robust during more troubled times.” Aviva Investors UK Equity Income has an 0.81 per cent OCF and yields 3.58 per cent.
Source: FE Analytics