Cash compounders
In terms of total returns, it is worth noting that Miton UK Multi-Cap Income, Chelverton UK Equity Income, Marlborough Multi-Cap Income and Unicorn UK Income are all among the top five best-performing funds in the UK Equity Income sector over the past 12 months (see table, right).
These are joined in the list by Evenlode Income, managed by Hugh Yarrow and Ben Peters, a fund that has a bias to quality and emphasis on picking stocks on a cashflow basis. The managers look for “cash compounders” – businesses able to generate high returns without the need for debt.
As investors debate this year’s big topic, a return to value investing, it is worth pointing out that UK equity income funds are as vulnerable to swings in sentiment as those funds with a growth focus.
Huge funds such as Adrian Frost and Adrian Gosden’s Artemis Income and Thomas Moore’s Standard Life UK Equity Income Unconstrained funds have similarly underperformed the FTSE 100 year to date (to 20 April), with mixed performance over three years (see chart 2).
JO Hambro UK Equity Income is another fund that has underperformed, but with the naturally contrarian Clive Beagles and James Lowen having invested early into value-oriented resources stocks following the dividend cuts that have blighted the space.
“In the commodity and mining sectors, which rallied strongly in late February and early March, we trimmed positions to make sure our aggregate exposures did not expand as the stocks went up,” they said in an April update.
“In more recent days, as the sectors have come under pressure, we added again. Among all the names, BP continues to be a standout laggard, and we increased our position.”
Glenn Meyer, head of managed funds at RC Brown, believes this is a sensible strategy that stands out from the many conservatively run ‘me too’ funds, which populate the UK Equity Income sector.
“The cashflow from operations is sufficient to dig the stuff out of the ground, turn it into metal and sell it in a market where there is a depressed price,” he says.
“But [as a resources firm] you have already done all of your recalibration, you’ve cut your dividends and your big expenditure, and you are buying into something for the uplift of the cycle where earnings and dividends are likely to grow.
“Clive and James are better off saying they are going to buy after the dividend cuts and start adding to stocks now, than be stuck like other income funds that have long-held the sector and are holding fingers crossed behind their backs hoping that dividends don’t get cut.”
Thinking laterally
As mentioned earlier, the funds at the top of the yield pile over 12 months (see table, left) are those utilising covered call options, such as Insight Equity Income Booster, Premier Optimum Income and Schroder Income Maximiser.
However, in terms of more traditional funds, Meyer fears that some investors may be looking to income without really concentrating on the full amount of risk they are taking on in order to get an unsustainably high yield.
He says: “Thinking laterally, while many people are still looking to extract income from investments, they are actually chasing rainbows and looking at the way money was managed in the past when interest rates were not beaten down to such a low level.”
