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Income’s evaluation equation

Enhanced by their unwavering popularity over recent years, income funds have been the subject of great debate.

Much of the argument centres on the exact nature of an income fund. Is it the Investment Management Association’s definition of a fund that yields 110 per cent of the FTSE All Share? Some managers feel this measurement is too narrow. Perhaps it should be the income stream alone, thereby eliminating many of those portfolios in which the capital growth boosts performance to such a degree that they top every performance sector chart?

Talk of a rejig of UK equity income or more heavy policing of the sector is a moot point as it is highly unlikely the rules would be changed to such an extent that funds the size of Invesco Perpetual’s would be pushed out. Wherever they were placed, competing firms would be sure to have something to say about their inclusion.

The selection of an income fund depends on what a client is looking for, whether it is total return or a straight income stream. However, identifying which income fund does what is harder than it should be as more public and comparable data is based solely on total returns.

It is easy enough to see who the top performers are but just how much of the returns come from capital and how much from dividends is not shown. Nor does the data reveal how consistent a fund manager is with the provision of dividends.

When you have a client who relies on the additional income stream such a portfolio can provide, information such as this is essential.

Just look at the equity income sector today – the Neil Woodford’s giant Invesco Perpetual highincome fund is at the top of the peer group over three and five years to May 6. His income portfolio is second over the same timeframe. Little wonder the funds are the biggest retail vehicles in the UK.

However, when examined through Fundfact, a website constructed on behalf of income fund providers by Asset Risk Consultants (Arc), neither fund appears in the top five in terms of the number of calendar years of dividend growth (with the maximum score being 10 years).

Instead, the top five features other well known funds such as BlackRock UK income, Credit Suisse income, Rathbone income and Liontrust first income – all of which have 10 years. Threadneedle’s monthly income fund completes the top five on this basis with nine years.

That is not to say the Invesco funds do not get a good score for dividend growth (three years each) but they are certainly not among the best at providing it year in, year out, according to the Arc tables. They certainly do, however, come top on performance terms and years of manager tenure.

Fundfact, set up earlier this year with sponsorship from Liontrust, New Star, Rathbones, Threadneedle, Framlington and Newton, allows investment advisers and private investors to design their own multi-factor performance-ranking systems by selecting from a list of factors and applying a percentage weighting to each factor deemed relevant. It throws up some interesting facts.

When ranked on current yield figures, the top fund is the little-known Chelverton income portfolio with a yield of 8.08 per cent. There is a caveat from Arc in the current yield figures noting that distributable income may differ from the yield quoted due to yields being sometimes quoted on a prospective basis and sometimes on an historic one. Still, at least it is a place to see and rank yields in this space.

Completing the top five on this basis is Unicorn income (6.16 per cent), New Star higher income (5.7 per cent), New Star income (5.7 per cent) and Standard Life’s UK equity high income (5.42 per cent). The latter fund, according to Morningstar figures, is also the third-best performer in the sector over three and five years and top decile over three months and one year to May 6.

Highlighting the complexity in offering such data, Arc’s methodology relies on the compilation of a number of different sources. Wherever possible, up to 10 years of data was analysed with the return data primarily sourced from the Hindsight Version 5 Global Funds Database. Additional information was collected from fund factsheets, Trustnet and the fund manager.

In its report on the sector that led to the creation of the interactive website, Arc states: “The UK equity income sector offers investors a different investment opportunity set and the funds in this sector should be analysed using multiple factors rather than purely total return.

“The factors selected and the relative importance of each factor will depend on the specific circumstances and requirements of each individual investor.”

When users view the site, four factors are pre-selected as default, placing equal importance on both the capital and income sides of the evaluation equation. Three-year total returns and fund manager tenure are chosen to highlight capital growth while is income weighed up with current yield and years of dividend growth. The table is run using these four factors, putting 25 per cent weighting to the ranking in each component to provide an overall rank. On this basis, topping the chart is Karen Robertson’s Standard Life Investment UK equity high income, followed by Lincoln UK equity income trust and Threadneedle’s monthly income.

The more established and popular funds, Invesco Perpetual high income and Adrian Frost’s Artemis income, round out the top five. There are certainly some familiar names produced by this chart but it also flags some lesser-used portfolios such as M&G dividend, Resolution Asset higher yield and Henderson’s global care UK income.

The Arc website is by no means a final solution to the issue of data and of comparing equity income funds, nor will it immediately quiet the calls for stricter controls on the sector but it does at least offer advisers greater clarity – which at least is a step in the right direction. Still, a longer-term solution will have to be found at some point.


Remittance man

This week I would like to start with a consideration of the fundamentals of the remittance basis.


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