A closer look at the UK Equity Income sector through three tumultuous years of Britain exiting the European Union.
As we remain in relative political uncertainty, investors may be cautious about investing in the UK at the moment. As things stand, MPs are still fighting over the best exit strategy (if at all) and prime minister Theresa May has until 12 April to seek a longer extension to her negotiation process to avoid leaving with no deal.
A closer look at the UK Equity Income sector shows how funds have been reacting to and coping with the political upheaval in recent years. The sector currently has 90 constituent funds from 67 different fund providers, with all except one (TM RWC UK Equity Income fund launched in October 2018) having performance data available over one year, and data over three years available for 82 funds.
The Investment Association says that funds within the UK Equity Income sector must invest at least 80 per cent in UK equities which intend to achieve a historic yield on the distributable income in excess of 100 per cent of the FTSE All-Share yield at the fund’s year end on a three-year rolling basis, and 90 per cent on an annual basis.
The sector is home to many fund giants, with 18 funds reaching the £1bn mark; the £5.6bn Artemis Income fund is the largest fund within the sector.
Looking over three years, all funds saw positive returns, although some have not seen as strong returns as many. Smith & Williamson’s £3m UK Equity Income fund saw its fund return just 3.47 per cent over three years, while at the other end of the spectrum, the Man GLG UK Income fund saw a return of 41.29 per cent.
The last year tells a different story. Of the 89 with data available, 11 saw negative returns. The £40.8m MI Downing Monthly Income fund saw performance drop 8.36 per cent and the £611.7m LF Woodford Income Focus, which has seen flows slump in the past 12 months, also failed to return – its performance fell to -7.05 per cent over the 12 months to the end of March.
The top performing fund over the year is the Hargreaves Lansdown Select UK Income Shares fund, with a return of 9.65 per cent over the year, with Troy Asset Management’s £2.7bn Trojan Income fund tailing behind in second place, with returns of 9.15 per cent.
Funds in focus
This June will mark three years since the referendum.
Here is a closer look at the top five performing funds over three years as at the end of March.
Man GLG UK Income
Performance over 3 years: 41.29%
Fund size: £830.5m
Managers: Henry Dixon
Launch date: March 1999
About: This fund is the top performer over both three and five years, the fund uses a long-only strategy to achieve income higher than that of the FTSE All-Share index. The fund’s strategy has been refined over 14 years, the group says. The fund is overweight financials, its largest sector weighting, with holdings including banks such as HSBC and Lloyds, and also favours the oil and gas space, with top holdings coming from Royal Dutch Shell and Rio Tinto.
UBS UK Equity Income
Performance over 3 years: 40.64%
Fund size: £57.9m
Managers: Steven Magill and Guy Walker
Launch date: August 2012
About: The managers of this fund aim to achieve long-term capital growth through active management of a “diversified” portfolio invested in UK equities. It has seen inflows spike over the past two years – as at the end of March 2016, the fund size sat at £20.6m, resulting in growth of 181 per cent in two years. Similar to many UK equity income funds, the fund invests predominantly in cyclical stocks including Royal Dutch Shell, BP and GlaxoSmithKline.
Performance over 3 years: 39.21%
Fund size: £1.97bn
Managers: Kevin Murphy and Nick Kirrage
Launch date: May 2011
About: This fund typically holds between 30 and 50 companies, and follows the investment team’s value process. Kirrage recently told Money Marketing that managing funds is all about “producing the best results over the long term” and making value for money for your clients. He even added that the best time to buy the fund is when it is underperforming, although flows have steadily increased over the past few years, nearly doubling since April 2016.
JOHCM UK Equity Income
Performance over 3 years: 33.56%
Fund size: £3.47bn
Managers: James Lowen and Clive Beagles
Launch date: November 2004
About: This fund uses a “naturally contrarian” approach, according to its managers, using an all-cap approach and a total return emphasis, seeking both capital appreciation and income growth over time. Unlike many funds under the benchmark, this fund invests significantly (38.2 per cent) in mid- and small-caps; its large-cap allocation is 19 per cent below the benchmark.
Performance over 3 years: 33.56%
Fund size: £194.8m
Managers: Robin Geffen
Launch date: October 2012
About: Neptune founder Geffen runs this fund, which has a focused portfolio of between 30 and 40 holdings which have been selected at the manager’s discretion. The top 10 fund holdings are different to the majority of UK Equity Income funds in that it does not include Shell, BP, HSBC among others. Instead, mining giant Anglo American, science and chemicals group Johnson Matthey, and private equity group 3i top the list of largest holdings.