The outperformers waiting to take over

This article is part of
Hunt for income - November 2013

A number of things have conspired in 2013 to re-ignite investor’s love for UK equity income funds.

First there was the ‘great rotation’ out of bonds and into equities. Then a number of high profile companies committed to growing their dividends, and finally – although this has the potential for a negative affect on the sector – equity income veteran Neil Woodford announced he was leaving Invesco Perpetual in 2014.

The latter, which took place just weeks ago, has left some wondering whether to stick with their allocations to Mr Woodford’s funds or, indeed, switch to an alternative. But with 99 funds currently listed in the IMA UK Equity Income sector, finding a good alternative can be difficult.

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For Brian Dennehy, managing director at FundExpert.co.uk, there a number of options for investors depending on their priorities. He explains: “Income investors should opt for funds with outstanding long-term track records for income generation. In this regard, Artemis Income is outstanding. Growth investors (that is those who reinvest income) should seek out funds with consistently outstanding outperformance over longer periods, such as M&G Recovery or Schroder UK Mid 250. For a fund with momentum in its favour right now, opt for Standard Life UK Opportunities.”

Darius McDermott, managing director at Chelsea Financial Services, adds: “No single alternative fund will be able to deal with the switches that will probably result from this announcement, so I’ll recommend a few. Artemis Income, Rathbone Income and Threadneedle UK Equity Alpha Income.” But what do the statistics tell us?

Based on a five-year time frame to October 29, the best-performing funds – Mr Woodford aside – are the £351.3m Unicorn UK Income, £131.7m Chelverton UK Equity Income and £195.6m Standard Life Investments UK Equity Income Unconstrained funds.

Unicorn UK Income

Managed by John McClure, this fund has produced a top-quartile return in one-, three- and five-year time periods – returning 257.28 per cent in the latter to October 29. In comparison, the IMA UK Equity Income sector average return for five years to October 29 was just 111.82 per cent.

Mr McClure has been at the helm of this fund since it launched in May 2004 and his primary aim is to deliver a gross yield that is at least 10 per cent in excess of that produced by the FTSE All-Share index. According to the latest factsheet, this fund’s largest exposure on a sector basis is to support services at 28.4 per cent, followed by financials at 11.7 per cent.

Chelverton UK Equity Income

At £131.7m this fund certainly has the capacity to take on more investor assets and considering its long-term outperformance, it should be showing up on adviser radars if they re-allocate that Woodford money.

In five years to date, the fund has returned 208.34 per cent and has a historic yield of 4.14 per cent. In a different approach to the other ‘Woodford alternatives’ that have been selected by various market commentators, this fund invests primarily in AIM-listed UK equities, placing it at the more risky end of the spectrum and out of reach of perhaps the majority of ‘Joe-average’ equity investors. But for those willing to take the chance, managers David Horner and David Taylor have a combined 55 years experience of investing in smaller companies.