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Are Investors Wrong to Dump UK Equity Income Funds?

Investors sold £7bn worth of UK equity funds last year, but Sanlam's Philip Smeaton says there’s still lots of reasons to be excited by UK equity income

David Brenchley 1 February, 2018 | 9:32AM

Investors have been selling funds invested in UK stocks

Investors showed no love to UK equity funds in 2017. More than £6.7 billion of assets were pulled out of the Investment Association’s UK Equity Income, UK All Companies and UK Smaller Companies sectors, according to Morningstar Direct data to December 31.

The UK Equity Income sector took the brunt of this, with investors selling out of the sector to the tune of £3.7 billion through the course of the year. The Morningstar Silver-rated Woodford Equity Income Fund accounted for £1.3 billion of that outflow after two years of poor performance.

But others followed closely behind. The Bronze Rated Artemis Income Fund, run by Adrian Frost, saw net outflows of £887 million and the Scottish Widows Multi-Manager UK Equity Income Fund seeing £475 million outflows.

Were Investors Wrong to Sell UK Equities?

But Philip Smeaton, chief investment officer at Sanlam UK, questioned whether this was wise. He says the sector is still “a hugely popular option for British investors”. There’s still lots of reasons to be excited by UK equity income funds, he continues. This includes some chunky yields of between 4% and 6%, especially tempting given the current low interest environment.

Many commentators note Brexit uncertainty and a foggy political climate as an obvious reason to be cautious on UK equities. But Smeaton points out that the FTSE 100 is able to give investors exposure to overseas earnings. Around 75% of UK blue-chip companies’ revenues comes from abroad.

This benefited funds with holdings in the likes of oil majors BP (BP.) and Shell (RDSB) and drinks maker Diageo (DGE) in the immediate aftermath of the EU referendum when sterling sold off.

“While Brexit has presented a challenge to the UK economy, the sudden depreciation of sterling has meant those stocks have increased income payments,” explains Smeaton.

Smeaton was speaking as Sanlam unveiled its latest Income Study, which ranks funds on their performance, standard deviation and total dividend distribution during the previous five calendar years.

Which Funds Top Sanlam’s List?

The Miton UK Multi Cap Income Fund retains its place at the top of Sanlam’s White List for the third time running. Managed by Gervais Williams and Martin Turner, the fund yields 4% and produced total returns, with capital growth and income reinvested, of 14.8% in 2017.

The AXA Framlington Monthly Income, Marlborough Multi Cap Income and Slater Income funds follow in the list, yielding 4.3%, 4.3% and 4.5% respectively.

…. And the Funds that Disappoint

Meanwhile, the Morningstar Bronze Rated Schroder Income Fund, run by Kevin Murphy and Nick Kirrage, was the biggest faller in the study. It has become one of the poorest income payers, with disappointing performance and relatively high volatility, according to Sanlam.

The Aberdeen UK Equity Income, HSBC Income and Scottish Widows UK Equity Income sit at the bottom of the ‘Black List’.

Speaking about the risks of UK Equity Income funds, Smeaton admits there’s scope for investors to fall foul of value traps. “Today this situation is exacerbated because risk-blind passive funds are then forced to buy more,” he warns. “Ultimately, this is pushing up the valuations of high dividend payers to unsustainable levels.”

But he says smart managers know how to avoid these over-priced stocks. Smeaton says it’s important for investors not only to focus on yield, but to remain sensitive to the total return that is being paid.

“The amount of income paid is the backbone of every portfolio; however, choosing the most suitable income stocks is critical for investors looking to achieve the best results,” he explains.

“These yields are a valuable long-term strategy because reinvested income is the biggest overall contributor to total returns thanks to the compound interest.”

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Aberdeen UK Equity Income I Inc423.18 GBP0.27
Artemis Income I Inc2.51 GBP0.49
AXA Framlington Monthly Income R GBP Acc642.23 GBP0.63
BP PLC521.00 GBX0.79
Diageo PLC3,222.00 GBX-1.27
HSBC Income Income C3.28 GBP-0.18
LF Miton UK Multi Cap Inc A Acc Retl246.18 GBP0.55
LF Woodford Equity Income C Sterling Acc86.49 GBP0.56
Marlborough Multi Cap Income B Acc212.08 GBP0.12
Royal Dutch Shell PLC B2,334.50 GBX-0.55
Schroder Income Fd Z Acc101.27 GBP0.76
Scot Wid MM UK Equity Income A Acc239.90 GBP0.34
Scottish Widows UK Equity Income B GBP757.32 GBP0.56
Slater Income B Acc180.18 GBP0.54

About Author

David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk

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