There are just two funds in the IA UK Equity Income sector with the maximum FE Crown Rating of five: LF Miton UK Multi Cap Income and Man GLG UK Income. However, these funds have a correlation to one another of 0.8 (where 1 = a perfect correlation and 0 = no correlation), meaning there is little point in income investors holding them together.
However, the search for good funds with a low correlation to each other bears more fruit if we ease the criteria of this study to funds in the sector with four or more FE Crowns. Then, we have nine options rather than just two.
Here we take a closer look at the funds with a correlation of 0.5 or less with at least one of their top-rated peers.
Correlation of four and five crown-rated funds
Source: FE Analytics
LF Miton UK Multi Cap Income is the only fund on this list to have a correlation of 0.5 or less with three other top-rated funds in the sector.
FE Invest said its managers Gervais Williams (pictured) and Martin Turner adopt a highly distinctive approach to running an equity income portfolio
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“They explore the UK smaller companies universe in order to identify those companies which are able to generate cash and return dividends to shareholders,” the team said.
“They mainly focus on company analysis, as they aim to identify companies which can grow revenues and maintain their profit margins.
“Meeting with company management is part of the process, but the co-managers are more interested in understanding their business model.”
Two-thirds of the portfolio is invested in small caps, with the rest split between large- and medium-sized companies.
Miton has soft-closed the fund in the past and the FE Invest team warned that with strong inflows and performance, the group is likely to do this again sooner rather than later.
LF Miton UK Multi Cap Income has made 173.3 per cent since launch in October 2011, compared with 95.84 per cent from the IA UK Equity Income sector.
Performance of fund vs sector since launch
Source: FE Analytics
It is yielding 4.05 per cent; a £10,000 lump sum invested in the fund at the start of 2013 would have generated £2,943.76 in income in the five years to the start of 2018.
LF Miton UK Multi Cap Income is £1.29bn in size and has ongoing charges of 1.57 per cent.
Next up is Jupiter Income Trust, which has a correlation of 0.5 or less with two other top-rated funds in the sector.
Manager Ben Whitmore runs the fund with a value style, looking to purchase a diversified list of statistically cheap stocks.
He does this by using two value-based screens to provide a pool of potential investments, before analysing each company’s ability to generate cash as opposed to profits, the margin of safety in the valuation and the ability of the balance sheet to cope with unanticipated events.
“Importantly, the investment process concentrates on measuring value and not on forecasting the future earnings of a company or those of individual economies,” said Whitmore.
Jupiter Income Trust has made 84.74 per cent since Whitmore took charge at the start of 2013, compared with 69.56 per cent from the sector and 67.16 per cent from the FTSE All Share.
It is yielding 3.7 per cent. Investors making an investment of £10,000 at the start of 2013 would have received £2,682.4 in income to the start of 2018.
The £2.5bn fund has ongoing charges of 0.94 per cent.
MI Chelverton UK Equity Income
MI Chelverton UK Equity Income and the remaining two names on the list each have a correlation of 0.5 or less with just one of their top-rated peers.
The fund invests in companies with a high initial dividend, progressive dividend payments and long-term capital appreciation. Like the LF Miton UK Multi Cap Income fund, it has a bias to small- and mid-caps, with less than a third of the portfolio in stocks with a market cap of more than £1bn.
In their most recent note to investors, published at the end of June, managers David Horner and David Taylor said that although they have recently struggled to find new stocks of the requisite long-term quality to add to the portfolio while retaining their balanced approach, the early-summer volatility had thrown up a number of opportunities.
“In the last month we have been able to buy positions in Aggreko, Rank Group and Bellway which are all ‘out of favour’ in the short term, but are companies that we believe have sound long-term prospects,” they said.
“We have funded these purchases from the sale of RWS, Computacenter and Electrocomponents after periods of strong long-term outperformance.”
MI Chelverton UK Equity Income is yielding 4.36 per cent and a £10,000 lump sum invested in the fund at the start of 2013 would have generated £3,597.92 in income in the five years to the start of 2018.
The fund has made 73.42 per cent over the past five years compared with 43.59 per cent from the sector.
Performance of fund vs sector over 5yrs
Source: FE Analytics
It is £672.4m in size and has an ongoing charges figure of 0.86 per cent.
The Schroder Income fund is run by value stalwarts Nick Kirrage and Kevin Murphy (pictured). They begin their process with a screen that highlights the cheapest 20 per cent of stocks in the market, before applying a checklist of seven different questions to each one, leading them to reject 98 per cent of companies recommended by the screen
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When markets are low and falling, the managers are likely to be aggressively positioned as often they see such short-term volatility as an opportunity.
Square Mile said this can be painful in the short term for investors but these times may mark the periods when the strategy has the greatest opportunities ahead of it.
“The strategy deployed by Kirrage and Murphy is a credible one, and a little different from the more traditional equity income approach, which should add value over the longer term,” the team explained.
“Investors should note that a contrarian style such as this does tend to be more volatile than other equity income strategies.”
Schroder Income has made 138.94 per cent since Kirrage and Murphy took charge in May 2010, compared with 112.88 per cent from the sector and 106 per cent from its FTSE All Share benchmark.
Performance of fund vs sector and index under manager tenure
Source: FE Analytics
It is yielding 3.3 per cent. Investing a £10,000 lump sum at the start of 2013 would have led to income payouts of £2,327.04 over the next five years.
The £2.35bn fund has ongoing charges of 0.91 per cent.
Last up is UBS UK Equity Income. Manager Steven Magill picks stocks that are undervalued compared with their long-term average with the aim of building a portfolio that generates a running yield equal to or greater than that of the FTSE 100.
The fund is currently overweight oil & gas and Magill credits much of the fund’s recent outperformance to this position.
UBS UK Equity Income has made 59.4 per cent since Magill took charge in April 2013, compared with 51.79 per cent from the sector and 50.64 per cent from its FTSE All Share index.
The fund is yielding 3.8 per cent and a £10,000 lump sum invested in it at the start of 2013 would have seen £2,370.14 paid out in income in the following five years.
UBS UK Equity Income is £30.6m in size and has ongoing charges of 0.84 per cent.