After two years of monthly net withdrawals, investors finally put more money into the IA UK Equity Income sector than they took out last month, according to data by Calastone.
Investors have not added more to the sector in two years, according to data from the Investment Association, with May 2020 the last time it enjoyed inflows.
Around £36m of fresh investments entered the sector last month, a significant improvement on other UK sectors. Indeed, overall, a net £826m was removed from UK equity funds in May, making it the second worst month on record.
Investors have removed their capital from the market en masse this year despite the market performing ahead of global equities.
The FTSE 100 is made up of ‘value’ stocks such as banks, miners and oil companies, all of which should do well in a high-inflation, rising interest rate environment.
These firms tend to pay dividends, which in turn makes them favourites among income funds, suggesting investors have moved into these portfolio as a result of their underlying holdings.
However, some may also have allocated more money to this area due to the cost-of-living crisis, which is dragging down the purchasing power of investor’s savings, making an extra source of income welcome.
Income funds invested in UK equities are particularly sought after as they typically pay higher yields than those based in the US and Global markets.
As the sector has finally garnered attention from investors, Trustnet asked experts for their favourite UK Equity Income funds.
First up, Darius McDermott, managing director of Chelsea Financial Services, recommended the £2bn Schroder Income fund.
He said that its value-driven approach has helped it outperform as high inflation and rising rates have hampered growth stocks and favoured this fund’s approach. It has made 16.8% over one year, 11.3 percentage points higher than its average peer in the IA UK Equity Income sector.
This outperformance has been consistent over the past decade as well, with the fund up 172.9% while the FTSE All Share benchmark has made 114.7%.
Total return of fund vs sector and benchmark over the past 10 years
Source: FE Analytics
McDermott added that the UK is doing well compared to other markets due to the dominance of oil, commodities and utilities companies, with the likes of Shell, BP and Anglo American among the top holdings (together they account for 11.2% of all assets).
It’s current yield of 4.4% also makes it an attractive choice for income investors, according to McDermott.
Another option could be the Franklin Templeton UK Equity Income fund, recommended by James Calder, research director at City Asset Management.
He said that co-manager, Colin Morton, has been involved in the fund “on and off since the late nineties” and that he has a lot of faith in his value approach to investing.
Calder added: “When growth is doing well you'll suffer on a relative basis, but strangely enough, he's doing quite well now on a relative basis because of the sectors that he's favoured. His approach is being rewarded by the marketplace.”
The fund is up 9.8% over the past 12 months, beating both the FTSE All Share index and IA UK Equity Income, but it has also outperformed over a 10-year period with a total return of 150.8%.
Total return of fund vs sector and benchmark over the past decade
Source: FE Analytics
The Franklin Templeton fund is also used by Ben Yearsley, investment consultant at Fairview Investing, who said its exposure to FTSE 350 companies gave it resilient dividend payments.
He said: “You’ve got resilient yields from some of the largest UK companies, so I think it’s a nice core equity income fund and its very cheap – the OCF [ongoing charges figure] is only at 52 bits.”
Yearsley said that he pairs the fund with Ninety One UK Equity Income as the two complement each other within the same portfolio.
Total return of fund vs benchmark and sector since launch
Source: FE Analytics
It is focused on growing investors’ income over time, but returns have been lower than the FTSE All Shares index since its launch in 2015. It is up 41.8% since then whilst the benchmark returned 46.7%.
Yearsley added: “If you were to pick just one of those, you'd probably go for the Franklin Templeton one because most people want the higher starting yield and slightly lower volatility approach, which is less growth focused but I would the put the two together.”
