UK Equity Income Funds: The Good, Bad and Ugly

Investors face a wide choice of investment styles and approaches in the UK Equity Income sector today, with varying degrees of success

Richard Romer-Lee, 15 February, 2012 | 10:31AM

I have often written about the merits of equity income investing and 2011, after a few years in the wilderness, was another good year for investors who focus on yield. Healthcare and consumer staples--the traditional hunting ground for managers looking for yield--were up around 9% each last year, versus financials and materials which were down in excess of 20%. This doesn't necessarily come as that big a surprise given the broader economic environment in 2011. However, taking a longer-term perspective, it is worth noting that the average UK Equity Income fund in the IMA UK Equity Income sector has outperformed the FTSE All Share Index in nine of the last 13 years, while the average UK Equity fund has only outperformed the IMA UK All Companies sector average in four of the last 13 years (since 2000). A sobering statistic indeed, particularly when viewed against the backdrop of the extent to which mid-caps--another traditional hunting ground for many UK Equity managers--have outperformed both large- and small-cap stocks.

Turning now to focus on some of the underlying funds in the sector leads me to reminisce about the 1960s western classic The Good, the Bad and the Ugly, with the returns between the best performing fund in the sector achieving a remarkable 9% for the year, while the fund that delivered the lowest return for the year was down 11%. Putting this into context, the FTSE All Share Index was down 3.5% for the year.

The Good
In thinking about 'The Good' in 2011, I would have to highlight Neil Woodford's Invesco Perpetual Income and High Income funds, which were indeed the top performing funds in the sector. Woodford's emphasis on delivering a competitive total return for unitholders across a range of investment conditions, via the pursuit of an open-minded and pragmatic style of active management and a strong focus on delivering absolute returns, has always stood investors well, particularly in periods of market weakness. Investors are, however, also well aware that the fund's returns can be lumpy and can go through extended periods where they may lag those of the index. The risk-fuelled rally witnessed since the start of 2012 has, for example, left the fund trailing the index by some 3.3% and languishing at the bottom of the pile of the IMA UK Equity Income sector. Ultimately though, for investors that are patient and willing to take a long term approach the fund remains one of the best in the sector.

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