The Franklin UK Equity Income fund has taken first place in FE Trustnet’s annual risk/return research in the IA UK Equity Income sector, up from fourth last year.
Every year, we review the various Investment Association sectors on a wide range of metrics: cumulative five-year returns up to the end of 2018, the individual returns of 2018, 2017 and 2016, their annualised volatility, alpha generation, Sharpe ratio, maximum drawdown, and upside and downside capture relative to the sector average.
Funds are then scored on their average decile ranking for these 10 different metrics. When we reviewed the IA UK Equity Income sector at the start of 2018, the table was topped by AXA Framlington Monthly Income, followed by Royal London UK Equity Income and LF Miton UK Multi Cap Income.
Performance of fund vs sector and index over 5yrs to end of 2018
Source: FE Analytics
In this year’s edition of the research, the £599.9m Franklin UK Equity Income fund has taken first place thanks to its average decile ranking of 2.4; last year, the fund was in fourth place with a score of 3.2.
The fund – which is managed by Colin Morton, Ben Russon and Mark Hall – made a top-decile 32.85 per cent total return over the five years in question and is also in the peer group’s first decile for its returns in 2016, alpha and Sharpe ratio. It is not below the fourth decile for any of the metrics examined in this research.
Morton, who is the lead manager and has worked on the fund since 1995, is valuation-orientated investor who focuses on companies that he expects to pay a high level of dividends and are trading at a low valuation relative to the market.
The FE Invest team, which has the fund on its Approved List, said: “Similar to a lot of income funds, the Franklin UK Equity Income fund does provide the necessary income as it says on the tin. However, this fund’s managers differ in that their discipline across the team to dividend yield and bottom-up fundamentals leads them to appear as contrarian in comparison to peers.”
In second place is Robin Geffen’s £214.8m Neptune Income fund, which has an average decile ranking of 2.5. It’s in the IA UK Equity Income sector’s top decile for five-year returns, performance in 2018 and 2016, alpha generation and Sharpe ratio; however, it is eighth-decile for volatility.
Geffen runs a concentrated portfolio, which is broken down into three buckets: core holdings (owned for their income payouts), recovery stocks (unloved by the market and often higher yielding) and tactical holdings (offering exposure to favoured sectors).
Geffen is another manager that will build a portfolio that is significantly different to the index. For example, Neptune Income currently has 22.3 per cent in information technology, compared with 1.8 per cent in the FTSE All Share, while non-UK names such as Microsoft and Visa can be found in its top 10.
Source: FE Analytics
AXA Framlington Monthly Income (which was last year’s best performing fund in this research) has come in third place this time around with a 2.5 average decile ranking. This is the same score as Neptune Income, but its five-year total return was slightly lower.
The £387.3m fund is managed by George Luckraft and, as its name suggests, aims to pay out a monthly income with the potential for long-term capital growth. It will invest in companies of any size, with a preference for those displaying above-average income and capital growth.
Man GLG UK Income, which is run by FE Alpha Manager Henry Dixon and has a value approach, comes in fourth place with a 2.7 average decile ranking. An article on FE Trustnet recently highlighted how Dixon sees the fact that the UK’s valuation is at a 30-year low is creating investment opportunities.
The top-five is completed by Trojan Income, which is headed by FE Alpha Manager Francis Brooke and has a score of 3 alongside a 32.38 per cent five-year total return. Analysts at Square Mile Investment Consulting & Research said: “This fund is suitable for investors seeking a lower risk UK equity income strategy, in which income should grow over time; something that has been achieved every year since launch.
“Whilst there is a clear focus on providing a premium yield over the market, the managers will not unnecessarily place capital at risk by chasing higher yielding yet perhaps more risky and less income reliable stocks.”
Source: FE Analytics
The above table shows the IA UK Equity Income funds that came out worse in this research.
Smith & Williamson UK Equity Income heads it with a score of 9 and a five-year return of just 2.99 per cent. The £3m fund is in the tenth decile for total returns over five years and in 2018 and 2017, alpha, maximum drawdown, Sharpe ratio and upside capture.
L&G UK Equity Income isn’t far behind with a 9 average decile ranking and 3.94 per cent return, alongside bottom-decile numbers for five-year performance, alpha, maximum drawdown, Sharpe ratio and downside capture.