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Fund Review: UK Equity Income


This enduring attractiveness has meant the UK Equity Income sector regularly tops the Investment Association’s chart of best-selling sectors.

But the latest figures from the Investment Association (IA) indicate that UK Equity Income is falling out of favour.

In February 2015, IA UK Equity Income was knocked off the top spot by the Property sector, which clocked up net retail sales of £304m. The IA UK Equity Income sector had been the top-selling sector for eight consecutive months up until February.

Daniel Godfrey, IA’s chief executive, points out: “Property funds saw the greatest inflow whilst equity funds, which sold so well last year, saw a small net retail outflow for the second month running. Investors reduced their holdings of UK and North American equity funds in February in favour of Global, European and Japanese equity funds.”

Jason Hollands, a managing director at Tilney Bestinvest, comments: “In the case of UK equity funds, a net outflow of £530m was the largest since the onset of the credit crisis in January 2008.”

Turning to why this might be, he suggests: “These are clear signs that investors are skittish on equity market valuations, a factor that may be further exacerbated by recent headlines around the FTSE 100 passing 7,000 points for the first time, even though this is a poor gauge of actual valuations that, in price-to-earnings terms, remain far below the levels [seen] since the dotcom bubble.”

Referring to the relative preference for Europe and Japan as “destinations” for equity investment, Mr Hollands says advisers believe more opportunities lie in those markets where aggressive monetary policy expansion programmes have been unveiled.

According to FE Analytics, the IA North America sector has produced the best average return over 10 years to March 25, generating 142.88 per cent, followed by the IA Europe ex UK sector, which delivered an average return of 122.58 per cent. By comparison, the IA UK Equity Income sector lagged, with an average return over 10 years of 111.47 per cent.

The sector has also trailed the IA North America and IA Japan sectors in the short term. UK Equity Income delivered a sector average return of 11.39 per cent in the 12 months to March 25, while North America equity funds averaged 24.15 per cent and Japan equity funds generated a 29.48 per cent average return.

So perhaps UK investors are justified in moving their money out of UK equity income.

Although Jack Barrat, co-manager of the GLG UK Income fund, observes some better data coming out of the UK this year.

Mr Barrat elaborates: “This could be the year where the feeling of no growth gives way to growth and the feeling of deflation gives way to inflation, and that could have profound effects on certain areas of the market that have gotten overly complacent with the level of interest rates in the western world.”


PFS Chelverton UK Equity Income

This £363m fund is managed by David Horner and David Taylor and also makes it into the Investment Adviser 100 Club 2014. They primarily invest in fully listed and Alternative Investment Market-traded UK equities. The managers have delivered an impressive performance over five years, with a return of 128.58 per cent over five years to March 25. That said, performance has lagged the sector in the past 12 months though, returning 5.74 per cent. Galliford Try, Phoenix Group and Ashmore are the top-three holdings in the portfolio.

Lowland Investment Company

This investment trust has total assets of £442m and is managed by James Henderson of Henderson Global Investors. It has made it into the Investment Adviser 100 Club 2014 for the second consecutive year and has outperformed the Association of Investment Companies UK Equity Income sector over three, five and 10 years, according to FE Analytics. Over five years to March 25, it returned 148.19 per cent to investors, against the peer group average of 82.78 per cent. Among the portfolio’s top-10 holdings are Hiscox, Royal Dutch Shell and Provident Financial.


Royal London UK Equity Income

Martin Cholwill’s £1.8bn fund made it into the Investment Adviser 100 Club 2014 and also topped the latest Sanlam Income Study’s ‘white list’ of funds that have an ability to produce superior returns over the past five years. The manager invests solely in high-yielding UK stocks, according to the fund factsheet, with emphasis on firms “generating significant free cashflow to fund sustainable dividend payments”. It has achieved a top-quartile performance over three, five and 10 years, FE Analytics shows. Over five years to March 25, the fund generated an impressive 101.87 per cent return, placing it fourth out of the UK equity income funds on FE Analytics.

In this special report