Insight Equity Income Booster, TB Saracen UK Income and Man GLG UK Income are among UK equity funds that generated the highest income payouts during the course of 2017, research by FE Trustnet shows. 
The search for income remains a dominant theme in stock markets thanks to the relatively low yields on offer in the bond world and the demographics of ageing populations. While the likelihood of higher interest rates has put somewhat of a cloud over income-paying assets, equity income remains one of the most popular asset classes among investors.
However, discovering exactly how much an equity income fund has paid out in pounds and pence can be more challenging than you think, so in this article we have reviewed every member of the IA UK Equity Income sector to find out their income payouts across 2017.
In order to do this, we assumed an initial investment of £10,000 made at the very start of the year and FE Analytics shows that the average UK equity fund turned this into an income payout of £448.75 over the year (with a historic yield of 4.14 per cent)
Average yield of IA UK Equity Income sector
Source: FE Analytics
It should be no surprise that the very top of the table is taken up by ‘enhanced income’ funds that essentially sell off their capital growth for higher income distributions.
Insight Equity Income Booster generated the IA UK Equity Income sector’s highest dividend in 2017, with a payout of just over £800. The £108m fund, which is managed by Tim Rees and is currently yielding 7.58 per cent, is also the sector’s highest dividend payer over five years, paying out a total of £4,676.54 from an initial £10,000 investment made at the start of 2013.
Rees focuses on larger UK companies in his portfolio (top holdings include Royal Dutch Shell, BP and HSBC) as he sees these stocks as offering more stable cash flows. His current strategy is to concentrate on international earners, given the continued weakness of sterling.
In all, four of the five highest paying funds are ‘enhanced income’ funds with Schroder Income Maximiser (with a £763.18 payout on £10,000 in 2017), Premier Optimum Income (£737.59) and Fidelity Enhanced Income (£666.25) sitting at the very top of the table.
Some conventional equity income funds can also be found close to the top, however. Scott McKenzie’s TB Saracen UK Income paid the fourth highest dividend of 2017 at £684.25.
McKenzie employs a multi-cap approach to stock selection and only has around 35 per cent of his portfolio in large caps, compared with an 80 per cent weighting in the MSCI UK All Cap index benchmark. This makes the fund significantly overweight mid and small caps.
At the end of 2017, the manager said: “Whilst some of the large defensive stocks remain favoured by investors, we struggle to find value in this area of the market and we are very wary of their positive correlation with low bond yields.
“The portfolio has remained focussed primarily on mid- and small-cap companies and this strategic positioning helped to deliver a good performance for the year, as a whole. Our high exposure to financial and consumer discretionary sectors remains in place and we continue to have a correspondingly low allocation to defensive sectors.”
Source: FE Analytics
While UK equity income investing is often seen as a large-cap game, a number of the highest-paying funds are active further down the market cap spectrum.
Henry Dixon’s £395.6m Man GLG UK Income fund, which appears in sixth place, has more than two-fifths of its portfolio in FTSE 100 names but this still leaves it with 25.24 per cent in the FTSE 250 and 15.69 per cent in small caps and ‘others’.
David Horner and David Taylor’s £581.7m MI Chelverton UK Equity Income fund and Stephen Whittaker and James Lynch's £49.3m MI Downing Monthly Income fund are two high payers that pay little attention to large caps and have built successful income portfolios around smaller companies.
This doesn’t mean that all of 2017’s highest income payers were focused on small caps, however, as many have exposure to the UK dividend stalwarts you’d expect to see in the typical equity income portfolio.
The £986m Majedie UK Income fund, which appears in 12th place after a £509.05 distribution in 2017, has more than 55 per cent of its portfolio in large-cap names such as Royal Dutch Shell, BP, Legal & General, Aviva and Pearson.
Santander Equity Income and Santander Dividend Income, in eighth and 11th places respectively, also have a big chunk of their portfolios in large-cap stocks.
Vanguard FTSE UK Equity Income Index, which is the only index tracker in the IA UK Equity Income sector, appears in 15th place after paying out just over £500 on an initial investment of £10,000 at the start of the year. Given its approach, the £1.1bn fund also has a lot of exposure to larger companies.