There is an obvious attraction to the sector given the abundance of FE Alpha Managers in it, including Neil Woodford, Adrian Frost, James Henderson and Francis Brooke.
However, some market commentators have voiced concerns about possible over-ownership in the UK’s largest dividend-paying companies and have said that investors are putting their portfolios at real risk.
Martin Currie’s Alan Porter recently told FE Trustnet that he felt the IMA UK Equity Income sector was "very concentrated" and that given the risks involved of holding popular stocks, he was "astonished" at the amount of money piling into it.
Although GlaxoSmithKline is commonly viewed as one of the UK’s safest and highest-quality businesses, our data shows that just over 73 per cent – a clear majority – of funds in the IMA UK Equity Income sector count the FTSE 100 pharmaceutical giant as a top-10 holding.
As FE Trustnet has recently highlighted, one option for yield-hungry investors is to look to global equity income products.
However, for investors who want the comfort of investing in something closer to home, there are a number of UK Equity Income managers who have performed well by holding different stocks from the vast majority of their peers.
Unicorn UK Income
The five crown-rated Unicorn UK Income fund is headed up by John McClure (pictured), who is one of the best examples of a UK Equity Income manager who goes against the grain.
He says the majority of his competitors are glorified trackers because they all hold similar stocks to the index; therefore, he looks to the lower end of the market cap scale to find income and capital growth. FE Alpha Manager McClure's largest individual holding is FTSE Small Cap-listed stock Cineworld. His second and third largest holdings are electronics company Electrocomponents and construction firm Interserve, both of which sit in the FTSE 250 index.
His approach has certainly worked so far. The £158.9m Unicorn UK Income fund was launched in May 2004 and since then it has been the best-performing portfolio in the IMA UK Equity Income sector, with returns of 192.3 per cent.
It has considerably beaten its benchmark – the FTSE All Share – which has returned 115.08 per cent over this time.
Performance of fund vs sector and index since May 2004
Source: FE Analytics
McClure’s fund has also topped the sector over three and five years and is a top-quartile performer over 12 months, with returns of 41.35 per cent.
The fund has a headline yield of 2.94 per cent, an ongoing charges figure (OCF) of 1.59 per cent and requires a minimum investment of £2,500.
Standard Life UK Equity Income Unconstrained
As the name suggests, Standard Life UK Equity Income Unconstrained is not tied to a benchmark.
Thomas Moore (pictured), who manages the £139.7m fund, recently told FE Trustnet that he feels there is a "flocking" mentality in the UK Equity Income sector towards mega caps. He says the growth prospects for these companies are effectively over so investors should turn to smaller firms that will in turn increase their dividend over time.
Standard Life UK Equity Income Unconstrained holds 48.4 per cent in companies listed on the FTSE 250 index and 38.6 per cent in FTSE 100 businesses.
The fund was launched in March 2007 and has beaten the sector over five years. However, it is since Moore took over the portfolio in January 2009 that performance has really picked up.
Since launch, it is the fourth-best performing UK Equity Income portfolio, with returns of 132.46 per cent, beating the sector by 53.74 percentage points.
Performance of fund vs sector since Jan 2009
Source: FE Analytics
However, the fund has had a considerably higher annualised volatility than the sector since Moore has been at the helm.
Standard Life UK Equity Income Unconstrained has a yield of 3.72 per cent.
It requires a minimum investment of £1,000 and has an OCF of 1.91 per cent.
CF Miton UK Multi-Cap Income
Like Unicorn UK Income, CF Miton UK Multi-Cap Income has a bias towards the smaller end of the UK market and therefore carries a higher degree of risk compared with most of its competitors.
The £75.9m fund is managed by Martin Turner and Gervais Williams, the latter of whom has run both open- and closed-ended portfolios since 1993.
CF Miton Multi-Cap Income has yield of 4.46 per cent, one of the highest in the sector.
The fund’s smaller cap bias can be seen in its 31.9 per cent weighting to the FTSE AIM. However, Williams and Turner also hold 27.4 per cent in FTSE 250-listed companies and 8.4 per cent in the FTSE 100.
The fund has been a top-quartile performer in the IMA UK Equity Income sector since launch in October 2011, with returns of 44.29 per cent.
Performance of fund vs sector since Oct 2011
Source: FE Analytics
CF Miton UK Multi-Cap Income has an OCF of 1.77 per cent and requires a minimum investment of £1,000.
