Q: What were the biggest changes between this year’s and last year’s Principal White List?
A: The mid-year review of the White List emphasised the consistency of the quality managers in the sector. The familiar names of Neil Woodford, Adrian Frost, Leigh Harrison, Robin Geffen and Jan Luthman continued to be placed on the White List. The Troy Trojan Income fund is a strong new entrant and the Halifax UK Equity Income fund makes an appearance, though it is now managed by Scottish Widows who have funds in the Black List.
Q: Who were the biggest surprises both on the upside and on the downside?
A: The debut of the Troy Trojan Income fund in the White List was most welcome. The equity income sector is large and well established so it is a difficult field in which to find true differentiation. But the Trojan fund does just that. Its focus is squarely on delivering investors absolute rather than relative returns and its record of low volatility and maximum loss are outstanding. Despite this lower risk approach, Francis Brooke’s fund has delivered on income and capital return.
It is disappointing to see the Jupiter Income fund struggling towards the foot of the Grey List. Anthony Nutt is a sector stalwart but has endured a difficult three years. We hope that he can turn things around, but this is a highly competitive sector and making his way back up the rankings will prove a tough challenge.
Q: Have you seen any trends over the past couple of years?
A: There has certainly been increasing interest in global equity income funds as investors look to diversify away from the British market. Consistent with that theme the majority of managers in The White List have exploited their freedom to invest up to 20% in international markets to broaden their palette. It is also important to remember that the British market continues to have the strongest dividend culture globally and is by no means a play on the British economy. The earnings are truly international. (article continues below)
Q: What are the biggest challenges income funds face?
A: The last few years have been something of a perfect storm for equity income funds. The later stages of the bull market in 2007 saw low yielding mining and resources stocks dominate. We then had the financial crisis and the loss of the vast majority of banking dividends, and the 2009 rally was again led by low-quality low yielders.
However, the sector may soon turn the corner. Interest rates are set to stay lower for longer as policymakers seek to offset fiscal austerity, and this will increase the demand for income yield. Equity income managers are focusing on finding companies with strong balance sheets providing a secure income at reasonable prices. In a lower growth/lower income world that should prove attractive.
The suspension of BP’s dividend highlights the concentration of dividend yield in the British market, but as the global economy gradually recovers we will increasingly see companies reinstate and increase dividends. The BP issue should also encourage investors to utilise well-diversified funds rather than a short-list of high yielding stocks.
Q: The Investment Management Association (IMA) recently recombined the UK Equity Income and the UK Equity Income and Growth sectors. What is your stance on this?
A: I have some sympathy with the IMA in their attempt to create a level playing field for equity income funds, but the timing of the move [to split the sectors]—as dividends were being slashed and historic yields were misleadingly high—was poor. It was totally illogical to see some of the sector’s most consistent dividend payers removed from the core sector.
Recombining the sectors is the only sensible move and the new 90% of the FTSE yield one year rule and 110% three year rule appear sensible. In reality, the exact sector definition should not matter. Investors are looking for a steadily rising income with long-term capital growth.
Q: What differentiates Principal Investment Management’s services from those of other firms?
The White List is an objective study presenting and ranking funds on a key set of criteria, which we think matter to investors: income generated, consistent total returns and volatility. Investors can make assessments themselves or read our commentary for a further guide.
We also offer a White List portfolio where we actively manage a combination of the best equity income funds. This is particularly attractive for investors looking to reduce the burden of making investment decisions.
Away from the equity income sector, Principal manages a wide range of multi-asset discretionary portfolios, suiting various investor needs.