Tora: Conditions favour a perennial favourite

Investors who have kept faith with the UK Equity Income sector through thick and thin could soon find it regaining its relative performance crown


UK Equity Income has been a perennial favourite for investors for as long as I can remember. 

Not that it has always delivered to expectations. The financial crisis of 2007/08 led to many banks passing their dividends, which for a number of funds had proved the core for the equity income they sought. 

When BP, the biggest single provider of dividend income in the FTSE 100, cut its dividend shortly afterwards in the wake of the Mexican Gulf disaster, the situation for many managers was difficult to say the least, with both a drop in income and poor capital performance.

While the situation has improved somewhat since then, the marketplace for investors seeking income has also broadened significantly. Infrastructure and debt funds have become more popular, while a Global Equity Income option has also developed. 

Some higher income options are better provided by the closed-ended sector, though this has led in some cases to demand chasing the shares to a premium. Moreover, there have been some significant changes in the management of a number of funds.

Big names

This sector has been home to many of the best-known names in the investment management business. Tony Nutt, Bill Mott, Neil Woodford – all have been held in high esteem in this sector in the past. Tony Nutt announced he was stepping down two years ago. Bill will be surrendering his role at Miton at the end of this year. 

Neil Woodford famously departed from Invesco Perpetual to launch his own fund management firm, resulting in one of the most successful fund launches ever.

One fund that needs to re-establish its credentials is Unicorn UK Income. The best-performing trust over five years, and near the top of the tables over three, it has drifted down to fourth quartile over six months. 

The sudden death this year of John McClure, also well regarded as an income fund manager with particular expertise in smaller companies, may well have had an impact on returns, though the team he led, Fraser Mackersie and Simon Moon, are still in charge and had been together for a little while.

Two other smaller company specialist firms have also slipped back in the shorter-term rankings. 

Chelverton and Montanaro both feature in the five-year tables with Unicorn – Chelverton in the three-year top five too. But all are fourth quartile over six months – a reflection, perhaps, of the risk-off mindset that has taken charge of investor sentiment at a time of global geopolitical unrest. More settled conditions could see a return to form for these experienced managers.

Star turns

But if some of the longer-standing names are no longer hands on or have jumped ship, there are plenty of other star turns in the UK Equity Income sector. 

Francis Brooke of Troy Asset Management who runs the Trojan Income Fund, was not a familiar name to me but I learn he joined them from Merrill Lynch, where he held a senior position on their investment side, having worked previously for Foreign & Colonial. The fund tops the six-month table, comes in at a creditable 19th over one year and stays in the top half of the tables over the longer periods. One to watch, perhaps.

As for the laggards, if you need any confirmation of how difficult the smaller companies sector has become recently, you only have to look at the bottom of the six-month tables. Unicorn was the worst performer, but the Chelverton and Montanaro funds are also within the bottom four over this period. 

Interestingly, another smaller company specialist, Elite Webb Smaller Companies Income & Growth, actually manages first quartile performance over six months, but is the tail-end Charlie over three years. The fund’s manager, Peter Webb, was the founder of Unicorn.

The future is never certain for any sector, but demand for equity income seems assured. Recent figures on inflation from the Bank of England suggest that interest rates are likely to stay lower for longer than was thought likely, despite an improving employment situation. 

This in turn could lead to equities continuing to provide a better yield than domestic sovereign debt.

UK Equity Income never really lost its popularity. Most shares likely to be included in these portfolios will fall into the value category, which many believe remains the best long-term option for equity investors. 

This sector could well regain its relative performance crown at a time of general market uncertainty.