The rather unsettled state of markets around the world provides an excuse to revisit a sector considered to be more of a safe haven in times of stress. UK Equity Income has long been a favourite of advisers and their clients, though it has not been without its periods of difficulty. When banks were obliged to stop paying dividends and the Gulf of Mexico disaster hit BP, forcing it also to cut back on its payout to shareholders, UK Equity Income funds suffered significantly.
But conditions have moderated since then, though banks continue to be a problem area for these and other investors. Fortunately, though, the upward curve in dividend payouts from UK companies has been resumed. Given the importance of reinvested income when it comes to calculating the total return of equities as an asset class, it seems that UK Equity Income as a sector can once again be considered a core portfolio holding.
Which is not to say that due diligence does not need to be used when making a fund selection. Over six months the performance range in a sector populated with nearly 100 funds ran from a 20 per cent plus return to a loss of nearly 2.5 per cent, despite the affect of reinvested income. Over five years, the best performing fund returned nearly 150 per cent while you would have had to make do with a mere 17 per cent from the sector laggard. And plenty of these funds slip between quartiles with some regularity.
There is some consistency, though. Pride of place is shared between a number of funds that dominate the top of these tables. John McClure’s Unicorn Income fund and the PFS Chelverton UK Equity Income fund are in the top five for all the time frames reviewed, while Invesco Perpetual have three funds that stay close to the top, though only one – UK Strategic Income – can lay claim to a consistent top quartile performance.
Talking to John McClure, he acknowledged that conditions had improved, but pointed to the concentration of income generation, with the top 15 dividend producers accounting for nearly 60 per cent of the income available in the UK market. This, he said, created a risky environment, where a similar situation as that which assailed BP could have a devastating effect on portfolio performance. His preference was for stocks with a decent yield, where the dividend looked safe, which were out of favour, rather than the mega-yielding companies likely to carry greater risk.
Despite the undoubted success of McClure’s fund in the tables, it remains relatively small, with assets of a little over £200m. Admittedly this is a fivefold increase over little more than six months, but it remains dwarfed by some of the giants in the field. Contrast this with the Invesco Perpetual High Income fund, run by Neil Woodford, which has accumulated nearly £14bn-worth of assets. Interestingly, their UK Strategic Income fund, the most consistent of the Invesco Perpetual funds in these tables and run by Mark Barnett, is not a great deal larger than the Unicorn fund.
The laggards, sadly, include some well known names. BlackRock’s UK Income fund has a solid fourth quartile record, other than over five years when it creeps into third quartile, coming 39th out of 69 funds with what has to be said is a creditable return of 46 per cent against a sector average of 44 per cent. Other well known names, like Henderson, Insight and Ignis, also trail with some of their funds, demonstrating the difficulties in delivering consistent, above-average performance.
On the face of it, this appears a relatively easy sector from which to make selections, if you base them ion past performance, that is. Size does appear to count as well, though. The other contender for top honours in this sector, PFS Chelverton UK Equity Income, is even smaller in size than the Unicorn fund and, rather like Unicorn, is managed within a boutique specialising in smaller companies. Such a profile suggests higher risk, yet the consistency of these two funds surely demands more attention than they have received so far.
The upsets of recent years demonstrate that this sector is capable of delivering unpleasant surprises, but it does encapsulate one of the most important principles of equity investment. History tells us that we can expect half the overall return from shares to arise through the, hopefully rising, dividend stream that well run companies are capable of generating. While there are fallen stars in this sector – and nothing in the future can ever be considered to be certain – UK Equity Income’s place as a core sector for portfolios seems assured.