The four crown-rated vehicle, which is relatively small for a UK Equity Income fund, managed to beat its peers in the rising markets of 2009, 2010 and 2012, as well as the falling markets of 2008 and 2011.
Given that the vast majority of funds failed to outperform in both 2011 and 2012, and the high degree of volatility over the last five years, Cholwill’s achievement is all the more impressive.
Year-on-year performance of fund vs sector and index
| Name | 2012 (%) | 2011 (%) | 2010 (%) | 2009 (%) | 2008 (%) |
|---|---|---|---|---|---|
| Royal London UK Equity Income | 20.75 | -1.86 | 17.3 | 25.6 | -28.18 |
| IMA UK Equity Income | 14.01 | -2.9 | 14.58 | 22.88 | -28.54 |
| FTSE All Share | 12.3 | -3.46 | 14.51 | 30.12 | -29.93 |
Source: FE Analytics
Royal London UK Equity Income’s biggest margin of outperformance – 6.74 percentage points – came last year, when it returned 20.75 per cent, compared with 14.01 per cent from its sector.
Over the five years to 1 January 2013, Royal London UK Equity Income returned 25.39 per cent, compared with 11.38 per cent from the IMA UK Equity Income sector average, and 13.2 per cent from its FTSE All Share benchmark.
While this is a top-decile figure in the sector, a number of funds that did not achieve the feat have returned more, such as Unicorn UK Income, Trojan Income and JOHCM UK Equity Income.
Performance of fund vs sector and index 2008-2012
Source: FE Analytics
The fund is currently yielding 4.29 per cent, which is around average for the sector.
This is the second year running that Royal London UK Equity Income has outperformed five years in a row; indeed, 2005 was the last year that it fell short of its peer group.
Last year, Liontrust Macro Equity Income made the list, but it was a bottom-quartile performer in 2013, with returns of just 6.28 per cent.
Cholwill (pictured) says it has been his quality bias and emphasis on diversification rather than his market timing that has enabled him to be so consistent.
"It’s certainly my intention to try and generate consistent performance," he commented. "In my experience, clients don’t want to see a seesaw effect of topping the sector one year and falling to the bottom the next." "I look for companies with a good cash-flow, and those that have sustainable and growing dividends, which tend to do better in tough times."
"You’ve got to keep the winners and ditch the losers, which thankfully I’ve done quite well."
"I’d also point out the fund’s diversification, in that I don’t look to put all my eggs into one basket."
"It has 53 holdings, but I tend to only have 0.5 to 1 per cent in small caps, and no more than 2 per cent in mid caps, to keep volatility and liquidity risk down."
Royal London UK Equity Income is overweight small and mid caps, which Cholwill says has enabled him to capture the upside during market upswings.
"The fund has enough economically sensitive companies to participate in up markets, but it also has the downside protection that comes from a specific focus on cash-flow," he added.
The manager includes FTSE 250 companies Restaurant Group, BBA Aviation and Informa in his top-10 holdings.
Cholwill seldom makes big sector calls, and points out his fund has a below-average turnover.
While a number of industry experts have upped their risk exposure of late due to improving macro data and developments in the eurozone, he says he is unlikely to make any big changes.
Rob Gleeson, head of research at FE, says that smaller, more nimble funds have a greater chance of correctly timing market movements and consistently outperforming, but thinks all managers have to rely on a degree of luck to achieve above-average returns year-on-year.
"Even the best managers need a bit of luck, as there is no saying that their interpretation of market data will work from one year to the next," he explained.
"Quite often it’s a decision they made three years ago that will be the reason for outperforming."
"It’s useful to be a market timer, but I wouldn’t say it’s a long-term driver of returns. It’s only at significant inflexion points that overhauling your portfolio is effective; if you react to every piece of macro news, you’re not going to get very far."
Performance of fund vs sector and index 2008-2012
| Name | 2012 (%) | 2011 (%) | 2010 (%) | 2009 (%) | 2008 (%) |
|---|---|---|---|---|---|
| JOHCM UK Equity Income | 23.56 | -4.42 | 16.25 | 40.36 | -23.74 |
| Cazenove UK Equity Income | 20.42 | 1.03 | 17.32 | 20.78 | -25.93 |
| CF OLIM UK Equity | 20.01 | -4.68 | 20.64 | 23.02 | -25.33 |
| Rathbone - Income |
14.94 | -0.15 | 18.71 | 23.48 | -34.49 |
| IMA UK Equity Income | 14.01 | -2.9 | 14.58 | 22.88 | -28.54 |
Source: FE Analytics
Although they only narrowly missed out, Cazenove UK Equity Income, Rathbone Income, CF Olim UK Equity and JOHCM UK Equity Income are also well worth a mention in the consistency standings.
All four have underperformed the UK Equity Income sector in only one year out of five.
In total, only 18 of the 45 funds that beat the sector in 2011 repeated the feat in 2012. Among the best-known of these are Artemis Income, Invesco Perpetual UK Strategic Income and Threadneedle UK Equity Income.
In the next instalment, FE Trustnet will examine the most consistent funds in the UK All Companies sector.