Sanlam UK has released its half-yearly Income Study.
Running for more than 30 years, it’s a quantitative assessment that reviews and monitors the performance of all UK equity income funds over a six-month period. The Income Study categorises these funds into White, Grey and Black Lists.
The White List is the select group of funds that have established their ability over five years to produce superior total returns, where the Grey List can be a temporary home for a manager with an out-of-favour style, or an early warning signal for a fund in decline. The Black List is for consistent underperformers and may indicate the need for remedial action.
In order to determine the best and worst performing funds, Sanlam analyses the performance against the following metrics:
- absolute income generated over the past five calendar years;
- capital growth for each of the past five 12-month periods;
- volatility over the past five years.
The White List
The majority of the highest ranking funds in The White List have remained stable, with only three of the lower funds moving out in January 2018. There has been a slight shuffle in the top half of the White List, but the top nine funds have remain unchanged since the previous study.
LF Miton UK Multi Cap Fund, run by Gervais Williams and Martin Turner, has retained first place. Since qualifying for entry in January 2017, the fund has only ever placed first. Its high ranking dividend yield is supported by its consistently strong performance.
Since the dramatic fall of Thomas Moore’s SLI UK Equity Income Unconstrained Fund in 2016 – when it placed last in terms of performance – the fund has since delivered on its mandate. Despite having the highest standard deviation (due to past volatility in 2016), the manager has managed to perform consistently in all other years reviewed. The fund has subsequently strengthened its position in the middle of the White List, moving up two places.
Of the three new entrants, strong performance has helped the RBS Equity Income climb 13 places back into the White List, following its 14 place fall in January 2017. Other new entrants include Man GLG UK Income, which, after moving up 32 places in the previous study, has risen another four places to secure a position in the White List. The fund ranked first in performance in 2017 and has a respectable yield of 5.3%. Given that the fund entered the study in July 2016 and initially placed bottom of the Black List, Henry Dixon appears to have turned the fund around since becoming lead manager in November 2013. Finally, Lazard Multicap UK Income has crept into the White List, due to its lower volatility than many other funds.
The Grey List
The Unicorn Income Fund has once again dropped from the White List. The fund, which has a distinct small/mid cap bias, has had a very strong year in terms of performance, ranking third within the study. However, it’s placement in the Grey List is largely as a result of the damage inflicted in 2016, where the fund was one of the worst performers. This pattern of under and out performance is consistent over previous years, and has resulted in the fund producing a high standard deviation figure. It is this volatility which is to blame for it falling seven places into the Grey List.
The Threadneedle UK Equity Income Fund’s position dropped 18 places into the Grey List. The fund, run by Richard Colwell, is the highest ranking Threadneedle fund. Unlike Unicorn, this is predominantly due to disappointing performance in 2017, ranking 52 out of 60 funds. Threadneedle UK Equity Alpha Income and Threadneedle UK Monthly Income both rank in the Grey List, in positions 35 and 36, respectively.
The largest positive mover is the Santander Enhanced Income Fund, which has climbed 21 places from the bottom of the Grey List to the top of it. The fund has tended to pay out a high amount of income and this been supported by strong performance in 2017.
In contrast, the largest negative move has been from Kevin Murphy and Nick Kirrage’s Schroder Income Fund. The fund produced a respectable amount of income in the previous study but has since become one of the poorest income payers. Furthermore, performance has been disappointing and the resultant volatility is relatively high. Schroder’s enhanced income version, the Schroder Income Maximiser Fund, positions higher due to the additional income delivered.
The Black List
The Black List continues to be populated by the same repeat offenders, with the exception of two new entrants.
The first is the Ardevora UK Income Fund, which has dropped into the Black List after previously having a solid position in the middle of the Grey List. Performance is the key driver behind its 28- place fall, with 2016 and 2017 clearly been challenging for the fund. Similar to Ardevora, the UBS UK Equity Income Fund, a new entrant, has seen disappointing performance over the period.
Those funds that continue to place near the bottom of the Black List include the Scottish Widows UK Equity Income Fund, the HSBC Income Fund and the Aberdeen UK Equity Income Fund.
Chief Investment Officer at Sanlam UK Philip Smeaton said: “Our Income Study illustrates the strength and breadth of a hugely popular investment option for British investors. Given the current low interest environment, there is a lot of reasons to be excited about UK equity income funds, with a number of them currently yielding between 4% and 6% a year.
“One element that makes the income market attractive is the UK’s exposure to overseas earnings. A large proportion of large cap companies in the UK generate their earnings from overseas, with some benefitting even further by paying dividends in dollars or euros. While Brexit has presented a challenge to the UK economy, the sudden depreciation of sterling has meant those stocks have increased income payments.
“There is a risk that investors purely motivated by yields could be falling into a trap. Chasing yields is a dangerous game – as eager investors pile into buying these stocks it becomes an ever-larger proportion of the index. Today this situation is exacerbated because risk-blind passive funds are then forced to buy more. Ultimately, this is pushing up the valuations of high dividend payers to unsustainable levels. Smart mangers with longer-term horizons will know to avoid these stocks as they are over-priced.
“It is important for investors to remain sensitive to the total return level and not be drawn in to chasing any stock that is paying income. For income-driven investors, the amount of income paid is the backbone of every portfolio; however, choosing the most suitable income stocks is critical for investors looking to achieve the best results. These yields are a valuable long-term strategy because reinvested income is the biggest overall contributor to total returns thanks to the compound interest.”