One fund that stands out is
orningstar.co.uk/UK/snapshot/snapshot.aspx?id=F0GBR04DXF&lang=en-GB&lastpage=Quickrank&LastPageURL=%2fUK%2fquickrank%2fdefault.aspx%3flang%3den-GB%26search%3dNew%2520Star%2520UK%2520Strategic%2520Income%2520Unit%2520Trust%2520Inc">New Star UK Strategic Income
. This fund of investment trusts has easily outpaced most of its sector rivals over the past three years, returning 29.3% on an annualised basis compared to 17.9% for its median rival. However, its risks should give equity-income investors pause. Its three-year standard deviation of 12% is the highest in the sector, and well in excess of the sector median of 8%. That owes much to the fund’s emphasis on split-capital trusts, which soaked up 30% of assets at year end. Although the world of split-capital investing is better policed than it was during the debacle of a few years ago, the gearing inherent in many split-capital structures, the high level of volatility that imparts, and the possibility of unforeseen risks arising from the layers of investments involved make us wary of this offering. The fund’s 2% TER is also extremely unattractive.Neil Woodford’s Invesco Perpetual High Income always merits a closer look—this is one of those offerings that is justifiably popular, but it may be packing more risk than investors realise. Its three-year return is among the best in the sector, and its standard deviation over the same period is below the norm, at 7%. That latter figure is a bit misleading, though. Woodford has retained huge bets on utilities and consumer goods (mostly tobacco), with the fund’s exposures standing at 24% and 23% of equities, respectively, as of 31 December. In short, a downturn in either group could badly hurt the fund.
That said, the stocks Woodford favours have defensive characteristics in general—robust cash flows and fat yields feature prominently, and his skill and experience give us more trust in this offering than we would otherwise have. In general, we’d also much rather invest with a manager who has the courage to place significant bets on his best ideas than with one who’s afraid to deviate from a benchmark. Even so, the fund’s industry concentrations make us leery of using it to anchor a portfolio at this point. Invesco’s failure to cut its TER below its current 1.69% in the face of massive asset growth is also extremely disappointing. At the fund’s current asset and TER level, it would throw off revenue in excess of £120 million per year, with more than £100 million of that going to Invesco Perpetual as a management fee.
On the subject of costs, Premier Dividend is the opposite of value for money. It levies a 2.37% TER on investors, an appallingly high charge. The fund also takes all of its charges from capital, which has the effect of enabling it to deliver a better income payout but heavily diminishes capital growth. The high charges are undoubtedly related to the fund’s tiny asset base, but that doesn’t make the end result any better for investors, and performance has been poor. Until fees here are considerably more reasonable, we’d stay far away.
A version of this article previously appeared in Investment Adviser, Financial Times Ltd.