InvestmentsJun 13 2019

Investors flee UK equity income funds

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Investors flee UK equity income funds

More than £15bn of assets have flown out of the UK Equity Income sector in three years, according to data from Morningstar.

Between January 2016 and April 2019, £15.6bn of assets have left the IA UK Equity Income sector, leaving £69bn of assets in the funds at the end of April 2019.

From April 2016 until the present, there has been just one month of net inflows into the sector.

The sector, which presently has 84 funds, has been revamped over the past years.

Prior to March 2017, a fund in the IA UK Equity Income sector had to achieve a yield of 110 per cent or greater of the market as a whole but this was scrapped in 2017 and now funds in the sector must simply match the yield.

Under the old rules a number of large funds left the sector, including those previously run by Neil Woodford at Invesco, and Hugh Yarrow at Evenlode, as a result of not matching that yield target.

Brian Dennehy, an adviser at Dennehy Weller, said the decline in assets in the sector in recent years was largely attributable to this factor.

He said the removal of Neil Woodford’s Equity Income fund from the sector in 2018 may have contributed to the outflows. His suspended fund is now in the IA UK All Companies sector, which does not have a yield requirement.

He added: "Probably only about 30 per cent of income fund investors take income. So some [of the outflows] is total return investors raising cash levels which is widespread."

Morningstar noted that about half of the total outflows from funds still in the sector came from the Invesco Perpetual Income and High funds managed by Mark Barnett, which Mr Woodford had managed before leaving to set up his own firm.

The data showed that £7.5bn of the outflows from the equity income sector has come from those funds.

As those mandates had previously been run by Mr Woodford, it is likely some of the outflows went into Mr Woodford’s product. But his new fund also had outflows of £3bn in the three years to the end of April 2019.  

The sector has returned 20 per cent over the past three years, with Francis Brooke’s Troy Income fund and Henry Dixon’s Man GLG UK Income fund having attracted net inflows during the period.

Tom Sparke, investment director at GDIM, a discretionary fund management business in Cambridge, said: "I think there are a combination of factors at play here.

"UK focused equity income funds tend to traditionally hold larger positions in sectors that have been weak recently and we have seen the more dynamic and total return focused funds outperform.

"Brexit has also caused huge uncertainty and has prompted a lack of investment in the UK, less confidence in the future and weakness in specific sectors.

"Globally focused equity income funds as well as alternative income vehicles like infrastructure funds will have taken assets from the UK income giants too."