Artemis Income is one of the most held funds by investors aged 55 and over, according to Hargreaves Lansdown, and for good reason.
The £4.7bn fund run by FE fundinfo Alpha manager Adrian Frost was up 91.2% over the past decade, beating its peers in the IA UK Equity Income sector by 18.5 percentage points.
However, it is not a one-stop shop. Investing almost exclusively in UK large-cap equities, some investors that own the fund may wonder what else they should add to boost their portfolio returns.
Here, experts share with Trustnet the top funds that investors can add to their portfolio to complement the top-quartile performer.
Montanaro UK Income
Artemis Income mostly invests in large-cap companies, so Montanaro UK Income could offer some welcome diversification, according to Paul Green, manager in the multi-manager team at Columbia Threadneedle.
The Artemis fund has an 82% weighting to large-caps, whilst Montanaro UK Income invests solely mid- and small-cap stocks.
Many UK large-caps are renowned for their high yields, but investors do not need to sacrifice their dividend with Montanaro UK Income – its 3.8% yield matches that of Artemis Income.
The £78m portfolio was launched in 2006 with Charles Montanaro leading the strategy from 2012 and Guido Dacie-Lombardo coming onboard in 2020.
Over the past decade, it beat the IA UK All Companies sector with a total return of 79.4%, but it fell to the bottom quartile over the past five years. Its 6.7% return over the period was less than half of that of the peer group’s 16.8% leap.
Total return of fund vs sector over the past five and 10 years
Source: FE Analytics
It remained in the bottom quartile over the past one and three years in what has been a difficult period for small-cap companies, but Green said that investors can use this to their advantage.
Stocks at the smaller end of the market cap spectrum were some of the most vulnerable to high inflation and interest rates, but the prospect of those lowering soon could spell good news for Montanaro UK Income.
Green said: “With last year being a particularly tough one for smaller companies, we feel that now could be a reasonably good entry point into this asset class, especially when combined with the dividend reset post Covid, dividend growth from here should also be relatively attractive.”
Investors who allocate to the fund now could see slow performance over the short term but significant growth when the economic outlook improves.
Green added that he has conviction in Montanaro and Dacie-Lombardo’s ability to select a strong set of stocks that can outperform in a small-cap rebound.
He said: “Portfolio construction is thoughtful, with weightings determined by a combination of conviction, dividend yield, dividend growth and liquidity rather than tightly managed against a benchmark, meaning alpha potential is high.”
Dunedin Income Growth
Investors seeking exposure to income stocks outside of the large-cap space may also want to consider Dunedin Income Growth, recommended by Ryan Lightfoot-Aminoff, investment trust analyst at Kepler Trust Intelligence.
He agreed that now could be an opportune time to allocate to small-caps given their recent underperformance and improving economic outlooks.
“The managers believe their focus on quality should offer the portfolio resilience in times ahead and we believe the small- and mid-cap bias could aid performance if market optimism returns,” he said.
The trust does not disclose its market cap exposure, but nine of its top 10 holdings are large-cap companies.
Lightfoot-Aminoff pointed out that it only shares two stocks – RELX and AstraZeneca – in common with Artemis Income’s top 10 holdings, so it still offers some diversification at the top end of the portfolio.
One of its most unique features is the environmental, social and governance (ESG) screenings when stock picking, which has led to “a highly differentiated portfolio to many peers in the UK equity income space,” according to Lightfoot-Aminoff.
The £437m trust returned 78.9% over the past decade, taking a narrow lead against the IT UK Equity Income sector’s 75.6% gain.
Total return of trust vs benchmark and sector over the past 10 years
Source: FE Analytics
It may not have drastically outperformed its peer group, but its yield of 4.5% is higher than Artemis Income’s 3.8% dividend.
Lightfoot-Aminoff added: “An options writing programme supports the income generation of the trust, which allows the managers to focus on finding the companies best aligned to long-term secular growth drivers whilst also still generating an attractive, growing dividend.”
BlackRock UK Income
Investors looking for another complementary fund may also want to consider BlackRock UK Income, according to Jason Hollands, managing director of Bestinvest.
It beat its peers in the IA UK Equity Income sector (including Artemis Income) by 21.4 percentage points over the past 10 years, climbing 94%.
Returns were strong over the period, but its dividend yield of 3.7% makes it the lowest yielding of the funds recommended.
Total return of fund vs sector over the past 10 years
Source: FE Analytics
However, Hollands said that this is no cause for concern as managers Adam Avigdori and David Goldman focus on dividend growth over stocks promising the highest yield, making it an attractive long-term holding.
“The focus here is to target companies with strong or recovering free cash flows, rather than pursuing those with high headline yields today,” he said.
“An outcome of this approach is a portfolio with a blend of both high-quality businesses, augmented with more cyclical plays and a focus on income growth rather than yield maximisation.”
This preference for companies offering long-term dividend growth does not necessarily mean it favours small-caps stocks. Most of the fund’s holdings (67.6%) are in large-cap businesses.
Indeed, Avigdori and Goldman’s focus on free cash flows makes it resilient during tough periods, according to analysts at RSMR.
They said: “The focus on free cash flow gives the portfolio a more defensive nature. The flexibility to invest in turnaround companies and growth companies gives the fund the potential to perform in all market environments and take advantage of different types of opportunity.”