The £171m ASI UK Income Equity fund has beaten its larger IA UK Equity Income peers on a wide range of risk and return metrics for the past five years, research by Trustnet has found.
In this annual series, Trustnet reviews Investment Association sectors on 10 different metrics and scores the funds by their average percentile rankings. More details of the methodology can be seen to the side, but essentially the lower the score the better as it indicates better results in more metrics.
UK equity income funds have endured some tough conditions in recent years after the decision to leave the EU soured sentiment towards UK stocks then the coronavirus crisis prompted an unprecedented wave of dividend cuts.
This means the average member of the IA UK Equity Income sector made a total return of just 16.19 per cent over the five years to the end of 2020, compared with 28.46 per cent from the FTSE All Share (which is the most common benchmark in the peer group).
Added to this, the average fund has been more volatile than the index and suffered a bigger maximum drawdown, while capturing almost of the market’s downside but just 84 per cent of its upside.
However, some funds have delivered strong returns and risk characteristics against this backdrop.
Performance of fund vs sector and index over 5yrs to end of 2020
Source: FE Analytics
Coming in first place in Trustnet’s research is Charles Luke’s £171m ASI UK Income Equity fund, which has an average percentile ranking of just 10.9.
The fund has the IA UK Equity Income sector’s second highest total return over the period under consideration (36.32 per cent) and its best Sharpe ratio. It also scores at the top end of the peer group for alpha generation, volatility, maximum drawdown and downside capture.
ASI UK Income Equity also held up well in 2020 and, like many of the funds that outperformed last year, this was down to a focus on high-quality companies. Top holdings in the portfolio at present include the likes of Diageo, Unilever and AstraZeneca.
Halfway through 2020, a portfolio update explained why the fund held up during the initial coronavirus crash. “Contributing to the performance were not holding Royal Dutch Shell and lender HSBC,” the management team said. “Our lack of exposure to the oil major was a positive as its shares fell in tandem with the energy sector on the back of the slump in oil prices on oversupply fears. For HSBC, its shares were dampened in tandem with most other lenders, given the likely protracted low interest-rate environment stemming from widespread monetary policy loosening to combat the pandemic.”
Source: FE Analytics
The above table shows the 20 IA UK Equity Income funds that came out best in our research and its highlights how far ahead of the rest of the sector ASI UK Income Equity is when rankings in all 10 metrics are considered.
In second place is Artemis Income comes in second place with a score of 21.6, thanks to its alpha generation and Sharpe percentile rankings being among the best of its peers.
Managed by Adrian Frost, Nick Shenton and Andy Marsh, the £4.5bn fund is the largest member of the IA UK Equity Income sector and has a strong long-term track record.
Square Mile Investment Consulting & Research, which gives Artemis Income an ‘AA’ rating, said: “The underlying investment process focuses on free cash flow. Whilst this is not a unique approach, it does guide the managers towards more robust companies and can help highlight the potential risks in their business models.”
In third place with a score of 22 is Robert McElvanney’s £54m Santander Enhanced Income Portfolio. As its name suggests, the fund enhances its income stream by using derivatives, which may reduce its capital growth.
That said, it’s total return over the past five years has been much higher than its average peer and not too far off that made by the FTSE All Share. The fund recently came in first place in the closely watched Sanlam Income Study.
Other notable funds coming out well in Trustnet’s research include Premier Miton UK Multi Cap Income, Threadneedle UK Equity Income and Franklin UK Equity Income.
However, obviously some funds will have been towards the bottom of the IA UK Equity Income sector over the five years looked at here. Below shows the 10 funds that have the worst average percentile rankings for the metrics used in this research.
Source: FE Analytics
ASI UK Income Unconstrained Equity has the worst record. It’s 9.3 per cent loss is the biggest in the sector for the five years to the end of 2020, while it also posted he worst result for alpha, and Sharpe ratio.
The fund has a value approach to investing, which has suffered in recent years as market leadership was taken by quality-growth stocks. It also invests in smaller companies, which have suffered as Brexit made investors nervous about the UK domestic economy.