The IMA definition states that funds in the sector must "intend to achieve a historic yield on the distributable income in excess of 110 per cent of the FTSE All Share yield at the fund's year-end".
Our data shows that the vast majority of funds are currently yielding more than the index, and all but one – CF JM Finn UK Equity Portfolio – have paid out more in the way of dividends than the average All Share tracker over three and five years.
Dividends are, of course, only one way that equity income funds can generate returns. The other one is via capital growth, which tends to play second fiddle to income due to the constraints detailed above.
However, FE Trustnet research suggests that some UK Equity Income funds – which tend to be looked upon as safe, boring and low in growth – are beating their growth rivals in the UK All Companies sector at their own game.
The likes of Neil Woodford’s Invesco Perpetual High Income fund – the quintessential large cap UK Equity Income fund – have smashed the capital growth achieved by the FTSE All Share and the majority of UK growth funds over the last decade. The fund also comes out on top against the index over three and five years.
Capital growth performance of fund, index and sector over 10yrs
Source: FE Analytics
Woodford’s Invesco Perpetual Income fund has also beaten both the All Share and the UK All Companies sector average on a capital growth basis over the last decade, as has FE Alpha Manager Mark Barnett’s Invesco Perpetual UK Strategic Income portfolio.
FE Research’s Rob Gleeson points out that income-focused funds such as these often do much better than expected in the capital growth stakes, because they protect so much better against the downside. "The growth versus value – or income – story is one that is very popular in the US, but not so much over here," he explained.
"The idea is that over the long-term, value does better because it’s so much better at protecting capital. If you don’t lose a lot of money, it means you don’t have to work so hard to make it back up again."
"If you manage to accrue small returns every year without losing much, you tend to do much better in the long-run."
Gleeson points out that if a fund loses 50 per cent one year, it needs to make back 100 per cent the year after in order to break even.
"If you look at any given year, then most of the UK growth funds might have returned more than Woodford’s, but because he hasn’t lost as much in the downturn, he looks a lot better over the longer-term."
Our data shows that his ability to protect against the downside in 2008 and 2011 has been the biggest driver of outperformance over the last decade.
Year-on-year capital growth of fund, sector and index 2007-2012
| Name | 2012 returns (%) |
2011 returns (%) | 2010 returns (%) | 2009 returns (%) | 2008 returns (%) | 2007 returns (%) |
|---|---|---|---|---|---|---|
| Invesco Perp High Income | 3.56 | 4.8 | 6.45 | 4.9 | -22.27 | 3.64 |
| FTSE All Share | 8.24 | -6.69 | 10.94 | 24.96 | -32.78 | 2.03 |
| IMA UK All Companies | 14.31 | -7.6 | 16.83 | 29.26 | -32.55 | 1.2 |
Source: FE Analytics
More recently, Unicorn UK Income has been the standout performer when it comes to generating capital growth – perhaps less surprising than Woodford’s feat, given that FE Alpha Manager John McClure focuses on small and mid caps.
Over the last five years, the fund has returned 116.32 per cent in capital growth terms, which compares with 54.73 per cent from the IMA UK All Companies sector average and 32.85 per cent from the FTSE All Share.
Capital growth performance of fund vs sector and index over 5yrs
Source: FE Analytics
In spite of the fund’s small cap focus, it has been slightly less volatile over the period, too. A recent FE Trustnet article pointed out that the fund has protected much better than its sector and benchmark in the recent market downturn.
McClure’s £203m portfolio was launched in May 2004 and so has yet to achieve a 10-year track record.
Gleeson explains that he only holds one UK fund in his personal portfolio, because it is possible to get a good mix of income and growth from a single UK Equity Income fund.
A recent FE Trustnet article looked at this possibility from the perspective of a UK growth fund, as many of the constituents of the UK All Companies sector pay out a decent level of income.
However, Gleeson points out that investors who rely on their investments to give them a regular income are best off sticking with a UK Equity Income fund.
"Personally I only hold a UK Equity Income fund – I have no UK growth fund in my portfolio," said Gleeson.
"I looked at UK All Companies funds and UK Equity Income funds together, and I went for JOHCM UK Equity Income. I’m looking for a good total return, and at the end of the day it doesn’t matter how a fund gets it – whether it’s through a mix of income and growth, or just growth – as long as it gets it."
"You have to be a lot more careful if you’re looking for a regular income stream, though. A UK growth fund may well have delivered a decent level of income in the past, but that could just be a coincidence. If the manager isn’t specifically targeting income, the investor can’t be guaranteed that they can consistently deliver it."
Gleeson says he likes the JOHCM UK Equity Income fund because it has a strict sell-discipline, which helps the fund deliver decent growth as well as income.
"When a stock in the portfolio goes below a certain yield level, the managers automatically sell it. This ensures that they capture growth, as it’s a rising share price that leads to the yield falling," he explained.
"They then recycle this money into a cheaper, higher-yielding stock with more growth potential."
On a total return basis, Clive Beagles and James Lowen’s £1.9bn portfolio is a top-decile performer in its sector since launch, gaining more than 140 per cent.
Performance of fund vs sector and index since launch
Source: FE Analytics
Regrettably, FE Trustnet does not have the capital growth data for the fund.
JOHCM UK Equity Income requires a minimum investment of £1,000 and has an ongoing charges figure (OCF) of 1.28 per cent. It also charges a performance fee of 15 per cent on top of that.
