Our market flows data confirms that just over £1bn was pulled out of Invesco Perpetual Income and Invesco Perpetual High Income from the end of September to the end of October this year. Assets under management (AUM) fell closer to £500m, but the gains made by the two funds over the one-month period mask the true scale of the outflows.
Conversely, the strong performance of the likes of Royal London UK Equity Income and Cazenove UK Opportunities has exaggerated their increasing popularity, but even after stripping out the impact of performance, they have grown significantly.
Flows in and out of UK Equity Income funds in Oct 2013
| Name | Size month ago (£m) | Size now (£m) | Performance effect (£m) | Underlying flows (£m) |
|---|---|---|---|---|
| Invesco Perpetual Income | 10,600 | 10,200 | 220 | -660 |
| Invesco Perpetual High Income | 14,000 | 13,900 | 360 | -420 |
| Royal London UK Equity Income | 530 | 710 | 30 | 150 |
| Cazenove UK Equity Income | 500 | 650 | 30 | 120 |
| CF Miton UK Multi Cap Income | 180 | 250 | 10 | 60 |
| Unicorn UK Income | 350 | 420 | 10 | 60 |
Source: FE Analytics
It is impossible to monitor exactly where the inflows into these funds have come from, but it’s expected that a sizeable chunk has come from investors looking for an alternative to the Invesco Perpetual income portfolios.
In a recent FE Trustnet article, we looked at whether the doubters have made the right choice.
The Royal London UK Equity Income fund has been the bestseller overall, growing by just less than £150m over the one-month period. Manager Martin Cholwill has been one of the most consistent performers in the UK Equity Income sector of recent years, but has only recently gained recognition for his efforts from the industry at large.
The manager has beaten his UK Equity Income sector average in each of the last six calendar years and is also ahead so far this year.
Year-on-year performance of fund, sector and index 2007 to 2013
| Name | 2013 | 2012 | 2011 | 2010 | 2009 | 2008 | 2007 |
|---|---|---|---|---|---|---|---|
| Royal London UK Equity Income | 29.19 | 20.75 | -1.86 | 17.3 | 25.6 | -28.18 | 0.8 |
| Invesco Perp High Income | 23.38 | 7.67 | 8.99 | 10.94 | 9.81 | -19.42 | 6.97 |
| IMA UK Equity Income | 22.05 | 14.01 | -2.9 | 14.58 | 22.88 | -28.54 | -1.21 |
| FTSE All Share | 18.65 | 12.3 | -3.46 | 14.51 | 30.12 | -29.93 | 5.32 |
Source: FE Analytics
This, inevitably, has also led to very strong cumulative performance: Cholwill is a top-quartile performer in his sector over one, three, five and 10 years.
Matthew Hudson’s Cazenove UK Equity Income fund has been another top performer over the last five years or so, which has led to significant inflows in recent months. According to FE data, around £120m flooded into the fund in the month of October – more than a 10th of the total money taken out of Woodford’s two income portfolios.
Performance of funds vs sector and index over 5yrs
Source: FE Analytics
Hudson has returned 145.76 per cent over a five-year period, putting him just behind Cholwill, but well ahead of his sector average, benchmark and Woodford’s High Income fund.
The manager uses the same business cycle approach that Julie Dean’s hugely successful Cazenove UK Opportunities fund uses.
Two small cap focused equity income funds – Unicorn UK Income and Miton UK Multi Cap Income – were the third and fourth bestsellers over the period.
Both have been among the best-performing funds of their kind over the last year, and John McClure’s Unicorn portfolio is number-one in the sector over three and five years as well.
The popularity of Gervais Williams’ £257m Miton portfolio led to its soft-closure earlier this month, due to concerns over liquidity. All four of the funds mentioned above have something in common: a sizeable allocation to small and mid cap stocks.
Unicorn UK Income and Miton UK Multi Cap Income are invested exclusively in small and mid caps, while Cazenove UK Equity Income has a third in the FTSE 250 index. Royal London doesn’t disclose exactly how much it has in mid caps in its monthly factsheet, but Cholwill prides himself on looking down the market cap scale for opportunities.
Ben Willis, head of research at Whitechurch Securities, believes that many investors and advisers are moving their money into unsuitable products that are not comparable to the Invesco Perpetual income funds.
"It’s a big concern of ours," he said. "Woodford runs a great deal of money so it was always going to be big news."
"When looking for alternatives, people tend to look back to see which funds have done best. This is understandable, but you’ve got to delve a lot deeper to make sure you’re in the right product."
"These multi-cap income funds have done very well, but even talking to Matt Hudson recently, he said that mid caps were looking quite expensive, which is why he’s moving into some of the more undervalued large caps."
"Maybe funds like Unicorn can carry on their very strong run, but if you’re buying it now, you’re buying something that’s had a brilliant two years."
"It’s not only private investors who have reacted in this way, but some advisers as well. As long as they’re actively changing their focus with a smaller cap fund then fine, but if they’re looking for a like-for-like product, I’m not so sure."
The fifth best seller over the period was Invesco Perpetual UK Strategic Income, which is headed up by FE Alpha Manager Mark Barnett – the man set to take over Woodford’s funds in April next year.
It seems investors who want to retain access to Invesco Perpetual’s highly rated equity team but are worried about the transition period for Invesco Perpetual Income and High Income see Barnett’s £365m UK Strategic Income fund as a good compromise.
Willis agrees, arguing that Barnett’s fund is the best alternative to Woodford’s.
"When looking for an alternative, we looked at not only past returns, but volatility and correlation, to ensure we got a like-for-like product," he explained. "After all the number crunching, we found that Mark Barnett was the standout choice."
"We’ll give the fund 12 months and see how Barnett goes. At this point we don’t know how much he was hanging on the coattails of Woodford, but who knows – maybe it was the other way round."
FE data shows that the risk/return record of Barnett’s Strategic Income fund is far closer to Woodford’s over a five-year period, compared with the likes of Royal London UK Equity Income and Unicorn UK Income, which have been much more volatile.
Risk/return of funds over 3yrs
Source: FE Analytics
Woodford and Barnett’s funds also have a significantly lower max drawdown over the period, coping much better with the 2008 and 2011 downturns.
Hargreaves Lansdown’s Mark Dampier has similar concerns to Willis. When asked whether the money flooding out of Woodford's funds is going in to unsuitable products, he said: "I think you might be right. The problem is that a lot of investors look at performance tables, and don’t necessarily look beyond that."
"Mid caps have done very well, but does that mean it will continue? Of course not."
Dampier believes Royal London UK Equity Income is a viable alternative to the Invesco Perpetual funds however, saying it is one of the very few that has the capacity to take on a big bulk of Woodford’s assets.
"I think Threadneedle UK Equity Income and Royal London UK Equity Income probably could, but a lot of the others haven’t got the capacity," he explained.
Clive Beagles, manager of the JOHCM UK Equity Income fund, recently said that he doesn’t want big inflows as a result of Woodford’s departure. The firm has slapped a 5 per cent initial charge on the fund, which has a mid cap bias, though it remains available for no extra charge on the majority of platforms.
JOHCM UK Equity Income grew by £100m in October, though the vast majority of this growth came from performance rather than inflows.
While UK Equity Income funds have been an obvious beneficiary of the money flowing out of the Invesco income funds, it is interesting to note that less than £1bn flowed into the sector in October.
It is possible some investors are sitting on cash for now, but there’s a suggestion that some may have used Woodford’s departure as an opportunity to switch out of equity income and into growth – an issue examined in another recent FE Trustnet study.
Among the bestselling UK growth vehicles in October were Richard Buxton’s Old Mutual UK alpha fund and Cazenove UK Opportunities.