Income investors take caution

Assessing the merits of equity income funds is rarely black and white; for Principal Investment Management theres a grey area as well.

Income investors take caution


The firm guarantees headlines with its bi-annual Income Study, naming those UK funds that over five years have produced superior returns without taking excess risk (the White List), alongside those with a less than impressive track record (the Black List). The Grey List meanwhile is a “temporary home for a manager with an out of favour style or an early warning signal for a fund in decline”.

Those heading up the White List – Francis Brooke’s Troy Trojan Income and Threadneedle’s Leigh Harrison-led UK Equity Income and Alpha Income funds – rightly deserve the recognition in being able to achieve 20% plus net income over five years with relatively low volatility. This is especially true given the economic circumstances and, fresh into a double-dip recession, there is no guarantee that things will get easier in the coming five years.

The art of under-promise

Interestingly, Principal sees many managers as having maintained a cautious stance on predicting dividend growth within their funds and across the market as a whole. It says they are “preferring to under-promise as they attempt to over-deliver”.

This, says Principal, comes even after a 25% year-on-year dividend increase for the first three months of this year. However, stripping out special dividends payments from the likes of Vodafone and Cairn Energy, the rise becomes a more modest 6.6%. The best managers will be watchful of the unpredictable nature of these one-off payments, even if they come as a positive surprise.

Given the rough ride that the FTSE 100 has been through in the past three years, and not forgetting the scarcity of income available from traditional sources, it makes sense that investors too should be cautious. This also means not taking Principal’s list as gospel, though to be fair to the company its buy, hold and switch recommendations are made on the basis of thorough research rather than just the data.

Telling stories

It would take a brave soul to write off venerable managers Bill Mott (PSigma) and Neil Woodford (Invesco Perpetual), both of whom have funds in the Grey List, and Principal doesn’t – indeed, Woodford is still listed as a buy. Things can change very quickly in this environment and even those managers on the Black List – Liontrust, Jupiter, Henderson among them – have a story to tell. Investors should listen to them before making any rash decisions.

Income investing, specifically Asian equities and non-equity investing, is covered in more detail in the August edition of Portfolio Adviser, out now.




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