Our ratings use a mixture of quantitative and qualitative analysis – for example, the FE Crown Fund Ratings system is quant-based with a bias towards three-year performance, while the FE AFI is made up of fund-picks from leading financial advisers. These are used by Rob Gleeson and his FE Research team to create the FE Select 100.
Starting with the popular UK Equity Income sector, we look at the funds that score highly across all of our major performance measures.
The ratings page on FE Trustnet helps to identify the top-rated funds. Click here to find your own.
Invesco Perpetual UK Strategic Income
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FE Crowns: 5
- FE Alpha Manager: Yes
- FE AFI: Cautious, Balanced and Aggressive
- FE Group Rating: Outstanding
Unsurprisingly, Neil Woodford’s £10bn Invesco Perpetual Income fund is one of those on the list; what is more of a surprise is that the manager’s High Income portfolio is not the other.
Instead, FE Alpha Manager Mark Barnett’s £286m Invesco Perpetual UK Strategic Income fund takes the accolade. Not only does it have five FE Crowns, but it was also chosen by the AFI panel for all three of the risk-rated portfolios.
Looking at the fund’s strong performance, even versus Woodford’s funds, it is easy to see why Invesco Perpetual UK Strategic Income is so highly rated.
The fund is one of only a handful of its kind to be a top-quartile performer in the IMA UK Equity Income sector over one, three, five and 10 years.
Performance of fund, sector and index
| Name | 1yr | 3yr | 5yr | 10yr |
|---|---|---|---|---|
| Invesco Perp UK Strategic Income | 30.98 | 57.44 | 85.9 | 193.9 |
| Invesco Perp Income | 21.34 | 45.02 | 68.91 | 208.17 |
| FTSE All Share | 18.24 | 36.4 | 67.77 | 131.52 |
| IMA UK Equity Income TR in GB | 21.84 | 40.87 | 65.14 | 123.92 |
Source: FE Analytics
The fund’s record over five years is particularly impressive: it has returned 85.9 per cent, beating the All Share and UK Equity Income sector average by around 20 percentage points.
Not only has the fund been a standout performer from a total return point of view, it has also been significantly less volatile, performing much better in down markets, as the graph below shows.
Performance of fund vs sector and index over 3yrs
Source: FE Analytics
Inevitably, the fund also scores very well from a risk-adjusted return point of view, coming fourth in the sector in terms of Sharpe ratio over a five-year period.
Barnett’s fund is popular with professional investors and is a top-10 holding for fund of funds managers operating in the IMA universe. Among these is Martin Gray’s CF Miton Strategic Portfolio.
However, as of yet the fund has yet to garner significant demand from advisers and investors. There is a big advantage to this, however: the relatively small size means Barnett has the flexibility to invest across the market cap spectrum.
At the moment he has a defensive, large cap bias, but crucially he can move down the scale if he sees opportunities elsewhere. Unlike Woodford, he does hold some smaller stocks in his top-10, such as Thomas Cook, which is a top-10 holding. Arguably, Barnett’s greater flexibility goes some way to explaining why he has returned more than both Invesco Perpetual Income and High Income in recent years.
"It differs from Woodford’s Invesco Perpetual income funds in that the manager is not limited by the fund’s size and can therefore invest in some small and medium-sized companies if he believes they offer a compelling opportunity," said the FE Research team, which includes the fund in the FE Select 100.
Invesco Perpetual UK Strategic Income, which has a below-average yield of 3.1 per cent, requires a minimum investment of £500 and has ongoing charges of 1.7 per cent. Barnett has run it since 2006.
JOHCM UK Equity Income
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FE Crowns: 4
- FE Alpha Manager: No
- FE AFI: Cautious, Balanced and Aggressive
- FE Group Rating: Highly Commended
Managers Clive Beagles and James Lowen have a bias towards mid caps as well as companies at the bottom end of the FTSE 100. The fund is quite large at £2.1bn, but still has the flexibility to look beyond the largest companies: top-10 positions include Segro, Tesco and ITV.
This greater emphasis on mid caps means that the fund has greater potential to deliver capital growth. According to FE data, it has significantly outperformed its sector and All Share benchmark over one, three and five years. It is the third-best performer in the entire sector over five years, with returns of 116.88 per cent.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
The fund has been more volatile than its sector and index, but it is still a top-decile performer in terms of Sharpe ratio over the period.
Moreover, with a yield of 4.6 per cent, JOHCM UK Equity Income is one of the highest yielders in the sector and well ahead of Barnett’s portfolio, for example. Lowen and Beagles only invest in companies that are yielding more than the All Share and automatically sell when the level falls below the market, which ensures that the yield is competitive.
The FE Research team likes this disciplined approach, but warns investors that it could soon close to new money.
"The fund’s rigid discipline and limits on when it can buy and sell stocks ensures it sticks to its strategy and prevents the fund managers from making the common mistake of getting too emotionally involved in their holdings," the team said.
"One possible cause for concern is the fund’s size: the strategy is biased towards medium-sized companies and larger inflows could hurt the performance by forcing the managers to change their investment process."
"Because they want to remain free in their decisions and preserve what gives them an edge, the fund may close to new investors in the near future."
JOHCM UK Equity Income requires a minimum investment of £1,000 and has ongoing charges of 1.28 per cent. It has a 15 per cent performance fee, though.
JO Hambro is one of only two fund houses that has been branded “Highly Commended” for UK Equity Income.
Threadneedle UK Equity Alpha Income
- FE Crowns: 5
- FE Alpha Manager: Yes
- FE AFI: Cautious, Balanced and Aggressive
- FE Group Rating: Highly Commended
As well as being headed up by the highly rated Leigh Harrison, who is an FE Alpha Manager, the fund has five FE Crowns and is included in the AFI’s Cautious, Balanced and Aggressive indices. Moreover, alongside JOHCM, Threadneedle is the only other house that is "Highly Commended" by FE for UK Equity Income.
Launched in May 2006, the fund is one of the best performers in the sector since then, with returns of 79.02 per cent. It has also outperformed over one, three and five years.
Performance of funds, sector and index since launch
Source: FE Analytics
As its name suggests, the fund is a high alpha portfolio, meaning that it is high conviction and unconstrained when it comes to adding value to its benchmark. The fund only has 36 holdings, with 46 per cent of its assets invested in the top-10 of these.
Harrison’s flexibility has resulted in him having a number of significant overweights, including Marks & Spencer and Aviva, each at more than 4 per cent of AUM.
This differentiates UK Equity Alpha Income from Harrison’s Threadneedle UK Equity Income fund, which has a greater number of holdings and is more closely aligned to the All Share.
This higher flexibility has paid off: the Alpha fund has returned more over one, three and five years and since its launch in May 2006. The two funds have exactly the same yield – 3.5 per cent.
It has also been consistently less volatile than both its benchmark and sector, even though it is a higher alpha portfolio. The Alpha fund has also been less volatile than Threadneedle UK Equity Income over one, three and five years, albeit only slightly.
Threadneedle UK Equity Alpha Income requires a minimum investment of £2,000 and has ongoing charges of 1.62 per cent.
