Your IndustryApr 24 2014

Getting the best UK Equity Income fund

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by

You can not be sure of selecting the best UK Equity Income fund, warns David Holloway, marketing director of Rathbone Unit Trust Management.

He says: “We live in an industry where information, analysis and opinion is plentiful, making it easier than ever before to assess, compare and monitor the options available.”

While past performance is not necessarily a guide to the future, Mr Holloway says strong indicators to look out for are:

1) A strong record of dividend payouts over time, potentially increasing year-on-year.

Mr Holloway says this indicates that the stock selection process has been robust and consistent across a variety of market conditions.

2) A stable and long-serving team allies to an established and evolved investment process.

He says advisers should look for people managing the fund who know the fund, its investments and the market well.

3) This type of product should be considered for the long-term and the fund should be managed accordingly.

He says advisers should look for the fund manager ‘tuning out’ very short term market ‘noise’.

Consistent outperformance of the peer group and the FTSE-All Share index both in term of yield and total return over the medium-to-long-term (typically three years plus) is a good indicator of a strong fund, Mr Holloway adds.

4) Third party endorsement and recommendation is a good sign.

Support, both in terms of the more in-depth press articles, particularly those including intermediary analysis and in-depth analysis and subsequent ratings from reputable third party independent agencies, should be looked for.

When quizzing managers of UK Equity Income funds, Mr Holloway says advisers should “delve deeper” and check what resource and experience is in place to make the process repeatable.

He says advisers should check if the manager understands what elements have delivered results and assess what is the potential for mistakes.

Mr Holloway says: “Finance theory and much of the industry define risk as volatility (it underpins popular measures such as alpha and beta).

“The problem with this is that you will struggle to find investors who are worried about the possibility of their investments going up and down (unless they have very short-term objectives).

“What they really care about is if their investments go down, and stay there. In other words, risk should be defined in the intuitive sense as the threat of a permanent loss of capital.

“Your manager should be able to outline what he sees as the forms of risk that may exist – if he can’t identify them, then how can he monitor and mitigate them.

“Such risks might include price risk (buying at the right price will determine value); financial risk (debt burden); business risk (competitive threats) and inflation risk (risk to both real capital and income value).”

Darius McDermott, managing director of Chelsea Financial Services, says advisers should, as always, consult their client on their objectives first.

He says: “Are they looking mostly for growth? Or do they want a regular income? Use this to narrow down the pool of funds which may be suitable for them.

“Then begin looking for funds being run by managers who consistently delivered good performance for a number of years and, ideally, in a variety of market conditions.

“If a client wants to invest in more than one UK Equity income fund, make sure there is not too much overlap of holdings.

“You may want to consider choosing one fund that invests mainly in large caps and another that has more of a bias to medium and smaller companies, for example.”

He recommends asking advisers the following list of questions;

1) What questions should I ask managers of UK Equity Income funds?

2) Do you target income, a rising income or growth primarily?

3) From which element are your fees taken – growth or income?

4) What methods do you employ when choosing stocks?

5) How have you differentiated yourself from your peers in recent years, and how do you intend on doing so in the future?

Ben Yearsley, head of investment research at Charles Stanley, says UK Equity Income is a very competitive sector with many top managers.

Ideally, Mr Yearsley says you want a few that dovetail well and perform at different points in the cycle – you do not want them going up and down together. A key question to ask managers to get a good blend is about dividend growth prospects.

Mr Yearsley says: “It isn’t just about starting yield, it is about being able to grow that over time.

“If you want to minimise paperwork, etc, you could just have a fund or funds in the equity income space.”