Just six funds have consistently beaten the FTSE All Share’s yield by more than 10% each year, a study from Trustnet has found.
Income investing has been resurgent of late as investors have started to put their cash to work ahead of impending interest rate cuts from the Bank of England later this year.
Top of most agendas is getting a decent payout from dividends, with yields of particular interest to investors who want to get the highest income possible.
The IA UK Equity Income sector has strict rules in place to ensure investors are getting a fair yield. At present, each fund in the sector must achieve a yield that matches the FTSE All Share index over three years. If it fails, it is removed from the Investment Association (IA) peer group.
Additionally, should a fund deliver less than 90% of the FTSE All Share’s yield in any given year, it will also be excluded. It is worth noting, however, that these rules were relaxed during Covid, with funds given a pass on these requirements in either 2020 or 2021 (they could choose one, but were not permitted both).
With this, all of the funds in the sector have achieved their goal and remain in the peer group. However, these current rules only came into effect in 2017.
The new guidelines were amended after a swathe of income funds – including some of the largest portfolios at the time – failed to meet the previous criteria. This was to achieve a 110% yield over a three-year period.
For this study, Trustnet increased this hurdle rate one step further, looking at funds that have achieved a yield that is higher than110% of the FTSE All Share’s in every year since 2010, when the IA began collecting these records.
To do this we used data from the IA and took the yield as at the fund’s own end of year reporting window.
Source: Investment Association
Just six funds had a 100% track record. Fidelity Enhanced Income and Santander Equity Income Unit Trust were the two with the longest track records, achieving higher-than-market yields in each of the 14 years looked at. It currently yields 6.91%.
The former has been managed by David Jehan since its launch in 2009, with Rupert Gifford joining in 2020. The strategy is specifically designed to produce an income that is 50% higher than that of the index. To do this it predominantly invests in equities, but can also use derivatives such as cover call options to enhance the income.
Gifford runs the equity portion having worked closely with former longtime manager Michael Clark, identifying steady companies, which have tended to cope well with difficult economic conditions. Jehan looks after the derivatives portion of the fund.
Analysts at Square Mile Investment Consulting & Research give the £219m fund a ‘Positive Propsect’ rating and said: “The combination of these two elements is an appealing proposition for investors who have an income requirement. However, unit holders must recognise that what is gained on the swings is likely to be lost on the roundabouts.
“In this case, income will be higher than more traditionally managed UK equity income strategies, but this is likely to be at the expense of capital appreciation. That being said, on a total return basis (i.e. the combination of income and capital growth), there is unlikely to be too much difference, particularly on a risk-adjusted basis, in returns over the very long term.”
The £118m Santander fund has been managed by Robert McElvanney since 2020, who has continued its track record of beating the FTSE All Share yield by more than 10% in each year, although its aim is to match the current guidelines set by the IA.
It currently yields 4.34% and has been by far the best performer of the group over the past decade, returning 76.9%, placing it in the second quartile of the IA UK Equity Income sector over this time.
The fund managed to make the list ahead of its Santander Enhanced Income Portfolio stablemate. This fund, like the Fidelity portfolio, aims for a yield of 5% per year, but failed to beat our high hurdle rate in 2020, when its end of year date (31 March) coincided with the market collapsing due to the pandemic and the FTSE All Share had a supranormal yield.
Next, Premier Miton Monthly Income has achieved the feat in 13 consecutive years, while its cousin Premier Miton Optimum Income has achieved a yield of above 110% of the FTSE All Share in 10 years.
Emma Mogford has run the former as sole manager since 2020, replacing Eric Moore, who had in turn replaced Chris White. She was also added as co-manager to the Optimum Income fund at the same time, running it alongside Geoff Kirk.
Analysts at RSMR rate both funds and said the firm has a “highly experienced UK Equity Income team”.
On the Monthly Income strategy, they said it was a “traditional, uncomplicated UK equity income fund which has performed well (particularly from an income perspective)”.
“The focus on dividend growth has help contribute to income returns. The fund provides a better than average dividend yield with lower volatility. In addition, the manager aims to grow the dividend yield by 5% per annum. This has been achieved over the previous five consecutive fund years.”
On the Optimum Income fund, they liked its “core large-cap strategy”, while highlighting its use of a covered call strategy to enhance the overall level of income.
IFSL Marlborough Multi Cap Income and VT Downing Small & Mid-Cap Income are the final funds on the list to achieve the feat. Both invest predominantly in mid- and small-cap stocks. This has hit performance in recent years as this area of the market has struggled.