Insight: UK Equity Income

It is now five years since the Bank of England cut the UK base rate to a record low of 0.5 per cent. The UK has since had a new government, new financial regulator and a new governor of the Bank.

In what was described as an emergency, the base rate was stepped down as policymakers feared that the country was verging on financial depression.

But despite this, the UK has been seeing resurgence over the past 12 months - whether this is thanks to Mark Carney, the new governor of the Bank of England, or not remains to be seen.

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UK equity funds were the best-selling region in January 2014 for the third consecutive month, with net retail sales of £644m, according to the latest figures from the Investment Management Association (IMA).

But UK Equity Income funds specifically have had a tricky six months. The IMA stipulates that funds within the sector must invest at least 80 per cent in UK equities which intend to achieve a historic yield on the distributable income in excess of 110 per cent of the FTSE All Share yield at the fund’s year end.

They have always been a popular investment choice, and the 98-strong sector is home to some of the most popular unit trusts, such as the Invesco Perpetual High Income and Income funds.

But after the funds’ manager, Neil Woodford, announced his shock departure last year, net retail sales in the sector have fallen. It is worth noting that Mr Woodford managed 30 per cent of the UK Equity Income sector’s assets under management.

For example, according to figures from the IMA, net retail sales for the UK Equity Income sector in October were £358m, but in October fell to -£297m. This was mainly due to outflows following Mr Woodford’s announcement, and the funds have seen consistent outflows since.

Falling stars

Chart 1 shows the impact Mr Woodford’s departure has had on the Invesco Perpetual Income fund size. Since he announced his departure, the fund has consistently seen outflows. It was reported in January that the fund saw £500m of outflows in just one day. Mr Woodford is set to launch a similar fund when he joins Oakley Capital in May.

But despite the Woodford-inspired exodus, UK Equity Income has remained as the top selling sector for Isas on five fund platforms (Cofunds, Fidelity, Hargreaves Lansdown, Skandia and Transact) with net sales of £60.2m.

For the whole of 2013, UK Equity Income became the third-best selling sector of the year (after the Mixed Investment 20-60 per cent Shares and the Targeted Absolute Return sectors) with net retail sales of £1.8bn, and was the second-best selling sector for Isas with inflows of £374m.

Top unit trusts

Table 1 shows the top 10 performing unit trusts and investment trusts ranked over five years according to Morningstar data. The Table shows cumulative performance based on an initial £1,000 investment over one, three, five and 10 years as at 1 March 2013 with net income reinvested. The top performing unit trust is the £612m Unicorn UK Income fund which returned £4,143 over five years - 32.9 per cent annualised. The fund aims to deliver a gross yield of at least 10 per cent greater than the yield produced by the FTSE All Share index. Its largest holding are in support service - 26.3 per cent - such as its highest holding Berendsen, a textile maintenance service.