R&M UK Equity Income, TB Evenlode Income and Edinburgh Investment Trust are among the best options for investors looking for income strategies this ISA season, according to fund pickers.
Income has become increasingly difficult to come by in the post-financial crisis as the low rate environment created by central banks has made sitting in cash unattractive. As such, investors have increasingly turned to funds to supplement their income.
With just a few working days to make the most of their £20,000 ISA allowance and having covered funds for cautious, balanced and aggressive investors, as well as the one-stop shop funds, below FE Trustnet focuses on strategies for those looking to gain a tax-free income.
R&M UK Equity Income
First up is FE Alpha Manager Daniel Hanbury’s £282m R&M UK Equity Income which has an attractive yield of 4.25 per cent and is the choice of Ben Williams, investment manager at Saunderson House.
Williams said that while the fund has underperformed the IA UK All Companies sector – the benchmark to which he compares all UK equity funds – by three percentage points over the past three years, now could be a good time to add to the position.
Performance of fund vs sectors and benchmark over 3yrs
Source: FE Analytics
“The market consensus, that we are in the final straight of an equity bull market, makes Hanbury nervous,” Williams said.
“This has led him to rotate the portfolio towards higher quality companies on attractive valuations with conservative growth expectations and where dividend growth is likely to be upgraded.
“Weightings in the financials and resource sectors have also remained high given the excessive pessimism towards them has created attractive entry valuations.”
Hanbury took over the fund in 2013 from Richard Staveley and takes a systematic, bottom-up approach to investment, combined with a macroeconomic and style overlay.
At the end of last year became more focused on capital preservation than he has been for some time on the belief that markets were vulnerable to a correction.
Currently the fund is significantly underweight consumer staples and has larger positions in financials and oil & gas companies.
R&M UK Equity Income has a clean ongoing charges figure (OCF) of 0.9 per cent.
Artemis Income and Artemis Global Income
Andy O'Shea, head of investment research at Pharon Independent Financial Advisers, said with equities remaining his most-favoured asset class for income investors, he has chosen two funds offering diversified exposure to the asset class.
“Where would I put this year’s ISA money?” he asked. “Despite the recent-term volatility I still like the attraction of equities for the generation of income and would combine in equal weightings two long-term favourites: namely the Artemis Income and Artemis Global Income funds which generate yields of 3.95 per cent and 3.73 per cent respectively.
“Whilst the funds may not have the pizazz of some of the newer funds such as using covered-call options or other derivative overlays, they have just quietly got on and delivered ahead of inflation annualised returns of 9 per cent and 12 per cent (on a total return basis) or 5 per cent and 8 per cent (on a capital-only basis) respectively over the last seven years, through good old-fashioned stock selection.”
Performance of funds over 7yrs
Source: FE Analytics
The £5.9bn Artemis Income fund has been run by Adrian Frost since 2002 with co-manager Nick Shenton joining in 2014. The fund’s highest weighting is in financial stocks, which represent 37.7 per cent of the fund. It also has significant weightings to the consumer services (18.3 per cent) and oil & gas (9 per cent) sectors.
The £4bn Artemis Global Income fund meanwhile is managed by Jacob de Tusch-Lec since its launch in 2010 and is also currently overweight financials, which make up 40.9 per cent of the portfolio.
The global fund has an OCF of 0.8 per cent while the UK equities fund has an OCF of 0.79 per cent.
TB Evenlode Income
Sticking with developed market equities, Sam Buckingham, investment analyst at Thomas Miller Investment, said FE Alpha Manager Hugh Yarrow’s five FE Crown-rated TB Evenlode Income is another attractive proposition.
The fund focuses on companies with high returns on equity and strong cash flow generation and has been among the top performers in the IA UK All Companies sector over three and five years as well as since launch in 2009.
“In terms of income, Hugh places weight on dividend sustainability and growth rather than on current dividend,” Buckingham said.
“Although this can result in the fund yielding less than some of its peers – indeed, it is currently sitting outside of the IA UK Equity Income sector due to not meeting the criteria – investors can feel comfortable that the dividend is safe and will grow in real terms.
“We think it is a great fund to hold for the long-term and indeed it is a fund we expect to hold for the foreseeable future in our model portfolios.”
Performance of fund vs sector & benchmark over 3yrs
Source: FE Analytics
Over three years the fund has delivered a total return of 28.8 per cent compared with a 16.49 per cent for its average IA UK All Companies peer and a 12.17 per cent gain for the average IA UK Equity Income fund, its benchmark.
In terms of this year’s ISA season, he added that now is good timing as the team have recently announced it will be soft-closing on 1st May 2018 due to hitting £2bn in assets.
The fund has a yield of 3.5 per cent and an OCF of 0.9 per cent.
Merchants Trust
In the closed-end space, James Calder research director at City Asset Management, said Simon Gergel’s £507m Merchants Trust could be a good option for investors.
“Historically this was a FTSE 100 trust but recently the investment mandate has branched out moving a little way down into the FTSE 350 in order to maintain its goal of growing dividend,” Calder said.
“It has one of the highest yields in the sector making this a highly attractive opportunity for the equity income seeker.
“Its closed end nature means it has the benefit of a substantial income reserve giving it plenty of firepower for rain days.”
The trust is one of the Association of Investment Companies’ (AIC) “dividend heroes”, having an unbroken record of 34 years of dividend growth.
Over the past decade, investors would have received £5,692 from an initial investment of £10,000, according to FE Analytics. It has a total return over this period of 103 per cent.
The trust has a yield of 5.3 per cent and ongoing charges of 0.63 per cent, according to data from the AIC. Its shares are on a discount to net asset value (NAV) of 4.6 per cent.
Schroder Oriental Income
Last up, Shore Financial Planning director Ben Yearsley said for a different source of income investors could look to tap into the Asian equities theme.
“Tying into my long-term investment theme of loving Asia and developing markets I would look at Schroder Oriental Income investment trust run by Matthew Dobbs,” he said.
The £633m trust, which was launched in 2005, has been a top quartile performer in the IT Asia Pacific ex Japan sector over the last decade, as the below chart shows.
“Performance of fund vs sector and benchmark over 10yrs
Source: FE Analytics
Over the last decade, investors would have received £6,811 from an initial investment of £10,000, according to FE Analytics. It has a total return over this period of 273 per cent.
“I just like the story,” explained Yearsley. “It is tapping into the Asian story and actually what has been popular in the last year has been all the growth stocks – the Tencents, Alibabas – so you can argue that the Asian value story has been left behind a bit.
“So you are getting paid a yield 3-4 per cent and tapping into a longer-term growth theme. As long as you are happy to put your money to one side and forget about it and leave it for 10 years I think it is a different approach.”
Yearsley, who topped up his holding in the trust recently, noted that for those unwilling to pay the small premium on the fund, there is an open-ended option though it is not quite a mirror of the investment trust.
Schroder Oriental Income has a yield of 3.8 per cent and has ongoing charges of 1.95 per cent including performance fees, according to the AIC. Its shares are currently trading at a premium to NAV of 1.5 per cent.