“Despite government debt having fallen in price, and equity stocks having rewarded their holders very well in capital terms over the last year, remarkably, equities currently provide higher income than Gilts, he says, “investors can have the potential upside of equities without sacrificing income.”
However, he is careful to note that it is becoming harder to find yield in the current environment and notes that there are a number of stalwarts missing from this year’s income study, including the Invesco Perpetual Income Fund, because these funds are no longer in the IMA’s equity income sector.
“These changes are simply the result of a number of funds failing to, or electing not to, fulfil the requirements of the IMA (Investment Management Association) for membership of the 'Equity Income' sector, typically by not generating a high enough yield.
The white list
The Unicorn UK Income Fund maintains it top slot, SPI says on the back of another strong showing. And, despite the tragic passing of lead manager, John McClure, Surguy says, SPI expects the fund’s focus on smaller companies with strong cash flows and well covered dividends to continue to produce “solid, risk-adjusted returns”
An emphasis on smaller companies with high starting dividends is a strategy that has also served David Horner and David Taylor well, as it helped put their PFS Chelverton UK Equity Income Fund in second place.
“At our last meeting we were pleased to hear that despite strong capital appreciation they maintain an unwavering desire to continue to produce a solid and growing income from their vehicle; after all, that is what it says on the tin,” says Surguy.
The Royal London UK Equity Income Fund came in third, and SPI says, manager Martin Cholwill is banking on getting a boost from a broadening out of the M&A activity that has been seen at the larger end of the market, into the midcap space.
Other notable entrants in the white list according to SPI are the JOHCM UK Equity Income Fund, Threadneedle, which has three funds on the list: Threadneedle UK Equity Income, Threadneedle UK Equity Alpha Income and Threadneedle UK Monthly Income Funds and new entrant, Standard Life UK Equity Income Unconstrained Fund.
Of the new entrant, Surguy writes: “Marrying economic analysis with company meetings and research is a skill not all can master; Leigh Harrison and Richard Colwell obviously can.”
The Rathbone Income Fund also fared well, Surguy said, as did the renamed Schroder UK Alpha Income Fund, while the Fidelity MoneyBuilder Dividend Fund returns to the list.
“There is no secret formula to the Income Study; we look at performance, income and volatility. And we search out those managers who have delivered the highest level of income, the best returns and have done so at a lower volatility than their peers,” Surguy said.
Grey and Black lists
On the other side of the coin, SPI notes that some funds that were previously longterm members of the White list have fallen into the grey list on account of shift in market focus.
“Two funds, Aviva Investors UK Equity Income and Troy Trojan Income, previously long-term members of the White List, sourced the majority of their opportunities in larger capitalisation stocks, which have been less in vogue over recent years and hence we have seen them fall away into the Grey List. This could also be said of Artemis Income, which we mentioned in our previous review,” SPI said.
Of the blacklist, home to those funds where returns have not been very good, but still over £7bn in funds under management, Surguy says: “it often concerns us that investors will endure extended periods of underperformance.”
Pointing specifically to the two Scottish Widows funds that SPI says have been “permanently rooted to the bottom of this list”, Surguy asks: “we wonder who can be left invested.”
“Other candidates that worry us are Newton Higher Income, which has changed process once in the last eighteen months, and managers twice, also continues to struggle. Ben Whitmore at Jupiter has also not managed to turn the Income Trust around thus far,” SPI said.