However, most of its funds invest in a fairly limited universe of stocks, restricting themselves to large dividend-paying blue chips, which are regarded as more secure.
FE Research’s Charles Younes recently told FE Trustnet that liquidity is becoming an issue in the sector, particularly for the larger funds.
Looking across the top-10 holdings of most UK Equity Income funds, the same names crop up again and again – a staggering 77 per cent of funds in the sector count GlaxoSmithKline as a top-10 holding, for example.
There is a huge amount of money chasing a relatively small number of stocks, and it is no surprise that over the last few years one of the trends in the industry has been the development of multi-cap income products.
With this in mind, we look at five funds in the sector that do not follow the crowd, aiming to do something different from their competitors by generating yield from areas of the market that get less attention.
These funds may appeal to investors switching out of Neil Woodford’s funds – a third of our readers judging by our current poll’s latest results – or those who simply want to protect themselves against concentration risk.
Unicorn UK Income
FE Alpha Manager John McClure’s five crown-rated Unicorn UK Income fund is one of the best examples of a fund that has successfully located income and growth from different areas of the UK market.
McClure makes a point of investing outside of the mega cap UK market for yield and last year told FE Trustnet that the majority of his peers are "glorified trackers" who will struggle to add value.
His track record certainly backs up his views. According to FE Analytics, Unicorn UK Income has been the best performing fund in the sector since its launch in May 2004, with returns of 227.97 per cent, beating the FTSE All Share by more than 100 percentage points.
Performance of fund vs sector and index since May 2004
Source: FE Analytics
The fund also tops the sector over three and five years, and is the second-best performer over 12 months. It has a yield of 3.09 per cent.
The manager likes to invest further down the market cap scale than his peers: his three largest holdings – RPC Group, Berendsen and Electrocomponents – are all listed on the FTSE 250 index.
The fund’s strategy and historical returns have caused it to surge in popularity recently. The fund was £85m in size at the start of the year and has now grown to more than £350m.
Unicorn UK Income has an ongoing charges figure (OCF) of 1.57 per cent and requires a minimum investment of £2,500.
Standard Life UK Equity Income Unconstrained
As the fund’s name suggests, Standard Life UK Equity Income Unconstrained is not tied to a benchmark, meaning its manager Thomas Moore can look across the market for opportunities.
Although Moore has 39 per cent in the FTSE 100, he looks outside of the popular dividend payers for his income and has 45.9 per cent in the FTSE 250.
The manager says that investors now need to be taking a much more diversified approach when it comes to the UK market.
"Recent market action has highlighted the correlation between government bonds and some of the large cap defensive sectors that are widely held in traditional income funds," he said.
"As bonds have sold off, so have these bond-like areas of the equity market. This highlights the need for a more diversified approach to UK Equity Income. We currently see the most exciting opportunities outside the traditional income hunting ground of sectors like pharmaceuticals," he added.
The manager looks for companies that may have a low starting yield but are capable of increasing their dividend, instead of simply buying into stocks that already offer a decent level of income.
This strategy has worked so far: since Moore took over the fund in January 2009, it is the third best performing portfolio in the IMA UK Equity Income sector with returns of 158.03 per cent.
It currently yields 3.45 per cent and has an OCF of 1.91 per cent. The minimum initial investment is £1,000.
Chelverton UK Equity Income
The five crown rated Chelverton UK Equity Income fund, which is managed by David Taylor and David Horner, is another portfolio that is making waves in the sector.
Taylor recently told FE Trustnet that he and Horner will not invest in the FTSE 100. Instead they buy companies they deem "dull, but worthy".
They only invest in small and mid caps with a starting yield above 4 per cent. They will sell any stock whose yield falls below 2 per cent and will reinvest the money in new opportunities. The fund itself has a yield of 4.25 per cent.
The £165m portfolio was launched in September 2006 and struggled in its first few years. However, it has rebounded strongly since the crash.
Our data shows that Chelverton UK Equity Income has been the second best performing fund in the sector over five years, with returns of 169.77 per cent, and has beaten its benchmark – the FTSE All Share – by close to 60 percentage points.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
It is also the second best performer over three years and tops the sector rankings over one year.
Chelverton UK Equity Income is made up of 80 stocks, which are all equally weighted in a bid to minimise stock-specific risks. The OCF is 1.88 per cent and the minimum investment is £1,000.
CF Miton UK Multi Cap Income
The CF Miton UK Multi Cap Income fund is another that gets its yield from across the UK market.
The fund is co-managed by Gervais Williams and Martin Turner; Williams in particular is renowned for his expertise in the UK small cap market.
The fund was launched in October 2011 and has already grown to £200m in assets under management.
Since inception, the fund has returned 62.47 per cent while the average fund in the sector has made 37.30 per cent. It is also a top-quartile performer over one year.
Although the fund is a multi-cap portfolio, Williams and Turner only have 11 per cent in the FTSE 100. Instead, it is primarily weighted to FTSE AIM, FTSE Small Cap and FTSE 250 stocks.
As FE Trustnet recently highlighted, the managers say that the investment world has been turned on its head over the last few years. Williams believes that investors can no longer make money from simply buying into momentum stocks. Instead the managers use a buy and hold strategy and try to benefit from the compounding effect of company dividends.
CF Miton UK Multi Cap Income has an OCF of 1.77 per cent and requires a minimum investment of £1,000. It has a 4.08 per cent yield
Marlborough Multi Cap Income
This fund, run by Siddarth Chand Lall, has attracted a lot of attention since launch. It was only opened in June 2011 but has already amassed £470m worth of assets under management.
Despite its title, it focuses on the lower end of the UK market: stocks with a market cap of more than £20bn make up just 1 per cent of its assets.
Instead, the manager invests in small and mid caps and even holds 26.9 per cent in micro-caps, or companies with a market cap of less than £250m.
The approach has worked so far. Since the fund’s launch it has returned 50.03 per cent, making it a top-quartile performer in the IMA UK Equity Income sector. It has a yield of 4.06 per cent.
Performance of fund vs sector since June 2011
Source: FE Analytics
Marlborough Multi Cap Income fund comprises 145 holdings.
The fund requires a minimum investment of £1,000 and has an OCF of 1.52 per cent.
