The Schroder Income fund has been scrapped from Interactive Investor’s best buylist after an extended bout of underperformance and amid uncertainty over future dividends.
The £1.2bn portfolio, which has lost 25 per cent over the past year, is among the worst performers in its Investment Association UK Equity Income sector.
According to Interactive Investor, which announced today (November 10) it had removed the fund from its Super 60 rated list, it also failed to beat its peers over longer time periods and had not beat its benchmark, the FTSE All Share index, over five years.
The Schroder Income fund adopts a value-based approach to investing and — as value funds and shares typically perform better when inflation and interest rates are rising and economic growth is strong — has been out of favour for the past year and most of the past decade.
Dzmitry Lipski, head of funds research, said: “We have been closely monitoring the fund’s performance and positioning over the past six months, but unfortunately its return profile continued to deteriorate further.
“It has been acknowledged that the appetite for cheaper stocks has decreased significantly over recent years, which had a big impact on the performance of value strategies against the broader market.
“However, while we may tolerate funds that underperform due to the prevailing market environment, we are unable to endorse a strategy that has not been able to deliver due to stock selection.”
A Schroders spokesperson said: “As acknowledged by Interactive Investor, a valuation based approach has been out of favour for some time.
"The Schroder Income fund is one of the few genuine value funds in the equity income space, and as such, this has led performance to lag both peers and the wider market."
The spokesperson added that the fund retained a "highly regarded process" which specialised in out of favour companies and continued to provide an "important role" in clients' portfolios.
Outside of the fund’s capital growth, Interactive Investor said it was also concerned about the fund’s ability to maintain its historic yield, 6.4 per cent, amid the ‘dividend drought’.
Income investors are facing at least a multi-billion pound dividend shortfall this year as companies scrapped payouts to shareholders amid the crisis.
Banks and insurers were forced to suspend payments by the Bank of England as the central bank looked to ensure such companies maintained a cash buffer throughout the crisis.
This was particularly challenging for UK equity income funds with a value tilt, such as the Schroder portfolio, which typically have exposure to cyclical stocks such as banks and insurers.
When the banks stopped paying dividends, both HSBC and RBS were in the fund’s top ten holdings and accounted for 8.3 per cent of the portfolio.
The government also blocked large businesses that borrowed cash from the government to support themselves through the coronavirus crisis from paying out dividends to shareholders.