McClure, who manages the £44.7m Unicorn UK Income fund, says that the increasingly popular sector is populated by unimaginatively-run funds that pile into the same big dividend-paying blue-chips. “Some of them are never far away from the index, so for me I think they should charge index tracker fees. They think 10 per cent over or under their benchmark is a huge view, but that’s not true at all,” he said.
“I understand scalability, and we are small, so we can do things they can’t, but there’s no excuse for just following an index.”
Yesterday FE Trustnet research showed that a high proportion of UK equity income funds held big positions in the same few stocks in their top-10 holdings.
A comparison of the performance of the 11 funds in the sector over £1bn in size and the FTSE All Share shows a close fit, adding credence to McClure’s claims.
Performance of funds versus index over 5yrs
Source: FE Analytics
McLure acknowledges that 50 per cent of the income from the FTSE 350 comes from nine stocks, reducing the options for the managers of the biggest funds, but he says that it is possible to run large equity income funds without slavishly following the index.
“Neil Woodford, for example, takes a view – he moves in or out of BP or Shell. What I don’t like about some of the others is they don’t take a view,” he said.
According to data from FE Analytics, using the FTSE All Share as a benchmark, the Alpha of the 11 funds ranges between -2.24 per cent and 2.47 per cent. The average fund in this group has a total expense ratio (TER) of 1.47 per cent.
By comparison, the Allianz UK Index, which is an All Share tracker, has an alpha of 2.78 per cent and a TER of 0.7 per cent.
It should be pointed out, however, that all 11 of these funds are yielding more than the tracker, which currently has a one year historic yield of 2.98 per cent.
Neil Woodford’s Invesco Perpetual High Income has the highest alpha score of the giant funds, while Unicorn UK Income records 6.87 per cent.
McClure's portfolio invests down the market cap scale, and has the highest returns of any fund in the sector over three and five years; it yields 4.37 per cent.
Performance of fund versus sector over 5yrs
Source: FE Analytics
“We move down to the mid to small cap space and look for companies with a record of paying a dividend for a sustained period of time. James Halstead, for example, has increased its dividend in each of the past 25 years,” McClure said.