Income-seeking investors spooked by the ongoing Woodford Equity Income saga have been turning away from equity income funds for fear of contagion risk. In June alone, investors pulled almost a billion pounds out of the UK Equity Income fund sector, according to latest figures from the Investment Association.
Yet the latest Sanlam study of UK equity income funds suggests investors may be making a mistake. The asset management group’s bi-annual study of equity income funds shows that many are still turning in a strong performance, as well as delivering an inflation-beating income.
Sanlam’s report reveals the top performing equity income funds over a five-year period that have made its coveted “White List”, while also naming the worst performers of the group on its “Black List”.
It takes into account the amount of income a fund has generated over the past five years, the growth it has achieved in the past five 12-month periods, and the volatility of the fund over that time.
The four-star rated Neptune Income fund sits comfortably at the top of the table, moving up 25 places from the previous study six months ago. The fund has outperformed its peers, with a significant, returning 5.6% over the past year. Performance has been boosted by manager Robin Geffen’s decision to invest 20% of assets overseas at a time when UK stocks have been out of favour.
Sanlam said the fund had managed to achieve positive returns in a period when most funds had struggled. Geffen recently confirmed the sale of his firm, Neptune Asset Management to boutique group Liontrust in order to allow him to focus on his passion of investing.
Which Funds Top Sanlam's White List?
Meanwhile, The Bronze-rated Man GLG UK Income fund has climbed from seventh to second place in the table since the last report, helped by its healthy 5.4% yield – investors with £1,000 in the fund would have pocketed £226 in income over the past five years. Morningstar’s analyst Samuel Meakin says the fund’s bias towards smaller companies makes it special and “differentiates this strategy from many of its equity-income peers.”
Gervais Williams’s four-star rated Miton UK Multi Cap Income fund appears in third place, retaining a spot in the top three performers thanks to its low volatility - one of the key metrics used by Sanlam analysts to assess the health of a fund.
Santander Equity Income has staged an impressive turnaround. Just two years ago the fund found itself on the “Black List” but in the latest iteration of Sanlam’s study is the fourth top performing equity income funds. The fund focuses on British blue-chip businesses such as insurance group Prudential and IT firm Softcat.
The two strongest yields among the “White List” of funds came from the three-star rated Schroder Income Maximiser and two star rated BNY Mellon Equity Income Booster funds, at 8% - the funds would have delivered income of £401 and £426 on a £1,000 investment over five years.
…And Which Are on the Black List
At the other end of the spectrum, Silver rated Threadneedle UK Equity Income topped the “Black List” of worst performing equity income funds, according to Sanlam’s report. Despite a decent yield of 4.2% the fund is down 4.2% over the past year, dropping 23 places in the tables since the last Sanlam study.
A number of the names in the table have been serial offenders; the three-star rated Unicorn UK Income and Aberdeen UK Equity Income fund have regularly ranked poorly, with a negative return of 0.8% and 1.5% over the past year.
While stock selection will be to blame in some instances, UK Equity Income funds have faced a number of challenges in recent months with ongoing Brexit uncertainty, a leadership battle for a new UK Prime Minister and a fall in the value of the pound. The region has been widely out of favour with many investors, who have instead looked for surety from fixed income assets. According to most recent IA figures, some £2.4 billion poured into fixed income funds in June alone, with Corporate and Strategic bonds among the most popular choices.
But Philip Smeaton, chief investment officer at Sanlam UK, says cautious investors could be missing a buying opportunity: “Committing funds to a market at a time when it is out of favour has often been shown to be a profitable strategy. With the three-year anniversary of the referendum having passed and the next Brexit deadline delayed until the end of October, the prospect of regular dividends from some of the UK’s most successful companies is likely to remain attractive to investors either wanting capital growth or a source of income.”
However, Michael Clark, portfolio manager of the Bronze-rated Fidelity MoneyBuilder Dividend fund, adds that in many cases UK stocks yield more than bonds, even if they may be more volatile – German bunds, for example, have a negative yield in real terms, meaning that investors choosing these bonds are locking into a certain loss. “Bond funds have squeezed down their yields, while the same cannot be said for equities,” he explains. “Equities may be riskier, but you can pick the safest end of equity; companies with high credit ratings, good balance sheets and strong cash flows.”
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