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Fund Review: UK Equity Income


Towards the end of 2015, this was clearly demonstrated by both Glencore and Anglo American suspending their dividend payments as they laid out plans to survive the tough commodity space.

Research from the Capita UK Dividend Monitor for the third quarter of 2015 shows this bias towards commodities and resources is having an impact, with the dividend cover – a measure of dividend sustainability – falling to its “lowest level in six years”.

The report notes: “This is mainly, but not entirely, because of the UK’s heavily commodity-dependent stockmarket, dominated as it is by large oil and mining companies. The collapse in their profitability in particular has meant dividend cuts from some are inevitable.”

In spite of this, the Investment Association UK Equity Income sector was once again the bestselling sector in November 2015, with £448m of net retail inflows that month. It was also the most popular choice in three of the previous four months, with the Targeted Absolute Return sector just pushing it into second place in October.

So, what is driving this popularity? One obvious attraction is the Woodford Equity Income fund that passed its 12-month anniversary in June last year and now has £8.1bn in assets under management. Another factor could be the number of funds that are distinguishing themselves as unconstrained, or best ideas, or non-traditional UK equity income vehicles, trying to destroy the idea that UK equity income is all about the 15 highest-dividend payers.

For example, the best-performing UK equity income vehicle from the IA and AIC sectors in the past year is the Diverse Income Trust from Miton. It invests in businesses with the prospect of dividend growth and, as of November 2015, the £355m trust had 37 per cent of its portfolio in FTSE AIM-listed companies and just 12.6 per cent in the FTSE 100 index. This helped to deliver a one-year return to January 14 of 18.1 per cent.

Other top performers in the past 12 months include the Miton UK Multi-Cap Income fund and the PFS Chelverton UK Equity Income fund, which has almost half of its holdings in companies with a market cap of less than £500m.

Thomas Moore, manager of the SLI UK Equity Income Unconstrained fund (see page 27), points out that one of the benefits of this type of approach is not having to focus solely on the traditional big oil or pharmaceutical companies. Funds can go anywhere in the UK market and seek out non-traditional opportunities.

UK Equity Income remains one of the UK market’s most popular sectors, but it is also one of extremes. In terms of size, funds in the IA sector range from £8bn for the CF Woodford Equity Income fund to just £2.6m for the UBS UK Equity Income fund.

With so much choice, investors need to be aware of the risk of following the crowd and ensure the underlying strategy is something that will stand the test of time.


PFS Chelverton UK Equity Income

An IA 100 Club member in 2014, this £435m fund was launched in December 2006 and is managed by David Horner and David Taylor. It aims to provide a “progressive income stream” and achieve long-term capital growth by investing in “fully listed and AIM-traded UK equities”. It looks for high initial dividends, progressive dividend payments and long-term capital appreciation, and has delivered consistently strong returns, with the five-year return of 87.3 per cent more than double the IA UK Equity Income sector average of 43.1 per cent.

The Diverse Income Trust

Launched in April 2011, this investment trust has net assets of £355m and is managed by Miton’s Gervais Williams and Martin Turner. It aims to provide an attractive level of dividends by investing in businesses with the prospect of dividend growth, with 37.1 per cent of the portfolio held in the FTSE Aim index, 4.6 per cent in FTSE Fledgling companies and 19 per cent in FTSE Small Cap-listed firms. It tops the list of UK Equity Income trusts for the 12 months to January 14 2016 with a return of 18.1 per cent against the AIC UK Equity Income average loss of 0.3 per cent. The three-year return of 63.4 per cent is well above the 27.6 per cent sector average.


Finsbury Growth & Income Trust

Managed by Nick Train, this trust has appeared in the IA 100 Club in three of the past four years, including 2015. Launched in 1926, it has net assets of £743m and aims to provide a total return in excess of its FTSE All-Share index benchmark. Performance has been consistently strong, with a 10-year total return of 169 per cent compared with the AIC sector average of 66.3 per cent. It also tops the list across five years (98.8 per cent against the sector average of 54.6 per cent). The largest sector allocation is to consumer goods at 43.3 per cent of the portfolio. The top-five holdings include Unilever, Diageo and Hargreaves Lansdown.

In this special report