The UK Equity Income sector has been one of the stalwarts for investors seeking a reasonable return from their investments. Some of the highest profile managers have made their name in this sector, meaning some of the funds are of a considerable size, such has been their popularity. But managing money in this particular corner of the investment world has not been without its trials and tribulations.
When the financial crisis first started to develop, it was UK equity income funds that were among the biggest losers. Banks and BP furnished a strong dividend flow for income conscious managers, but the collapse of some and the bail out of others, coupled with the tighter restrictions imposed on capital adequacy, saw this source of income shrink significantly in importance. Then the disaster in the Gulf of Mexico for BP also saw a suspension of dividend payments.
Of course, it was not only the income stream that suffered. Capital values were eroded as well and performance in total return terms for a number of these funds suffered accordingly. But the sector has enjoyed something of a renaissance recently, as the popularity of Neil Woodford’s new equity income fund bears witness. Not only has performance picked up, but yields and interest rate levels have remained low elsewhere.
Today we have a situation where none of the funds in the sector has delivered a negative return over any of the time frames reviewed. What is more, this is a big sector where the greater majority of the major investment houses have a presence and in which a number of specialist boutiques operate. It is also still growing, with two further funds launched within the past six months, bringing the total available to 88.
While taking figures back just five years does mean the effect of the financial crisis of 2007/08 is excluded from performance, there are nonetheless some considerable swings in the fortunes of individual managers. In some measure this should not be too surprising. The hunt for income has focussed attention on higher yielding UK equities like never before. In such a competitive environment, shares can be chased too far, leaving a potential sting in the tail for an unwary manager.
Neil Woodford, one of the best known income focused investment managers, has got off to a good start with his new fund, which is ranked sixth over six months, returning 14 per cent. His old house, Invesco Perpetual, has yet to feature in the performance charts, following its reorganisation of the investment team. Unicorn, the leader still over five years, has slipped in the shorter term tables, possibly a consequence of the death of their lead manager, John McClure, around a year ago. Fraser Mackerzie and Simon Moon, who currently manage the fund, have stuck with his approach, though performance has slipped.
Unicorn was originally started by Peter Webb, a small company specialist, who left the manager several years ago. He has returned with a new vehicle, though, which qualifies for inclusion in the UK Equity Income sector. Elite Webb Smaller Companies Income & Growth has established a good recent record, ranking first over six months and fourth over a year, although it’s earlier start was somewhat more pedestrian. His return does appear to underscore that this is a sector with more than its fair share of well established names.
As for the laggards, UBS must be disappointed at bringing up the rear of the one year chart, while Elite Charteris Premium Income fund has also performed poorly over three and five years. Over six months a once-highly-regarded figure is tail end Charlie – George Luckcraft of Axa Framlington with his monthly income fund. His longer term performance stands up rather better, though, fitting into the second quartile over three and five years.
This is a popular sector – and arguably rightly so. This does not absolve advisers from carrying out proper due diligence, though, as evidenced by the wide dispersion of performance, which ranges between returning 26 per cent and 120 per cent over five years. For once, though, the experienced, consistent players look worth following.
Key Takeaway: While there is no guarantee that this sector will resume its position as one of the most consistent in performance terms, the combination of dividends and capital gains over the longer term should ensure it delivers attractive total returns. It includes some of the best respected investment managers, but be aware of changes to who runs a fund and any alteration to the investment approach.