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Sanlam’s half year study finds movers and shakers in equity income funds


Sanlam Private Wealth has released its half-yearly Income Study of UK equity income funds. The study, a quantitative assessment that reviews and monitors the performance of all UK equity income funds over a six-month period, categorises the funds into White List, Grey List, and Black List.

The firm writes that the White List is the group of funds that have established their ability over five years to produce superior total returns. The Grey List can be a temporary home for a manager with an out-of-favour style or an early warning signal for a fund in decline.

The Black List is for consistent underperformers and, unless remedial action is being taken, a sign for investors to look elsewhere. In order to determine the best and worst performing funds, Sanlam Private Wealth analyses the performance against the following metrics: Absolute income generated over the past five calendar years; Capital growth for each of the past five 12-month periods; Volatility over the past five years; In-depth – the best and worst performing funds revealed.

A new entrant to the White List is CF Miton UK Multi Cap Income, run by Gervais Williams and Martin Turner, which has knocked Francis Brooke’s Troy Trojan Income Fund off the top position. Sanlam writes that Williams and Turner’s fund has produced solid returns on a consistent basis, despite having a weaker 2016 compared to its own history. Furthermore, the fund has low volatility compared with peers as well as successfully providing more income than most over the past five years.

“The Schroder Income Maximiser Fund, run by Thomas See, has continued its upward trajectory and entered the White List after moving into the Grey List in the last review. It is the highest climber in the December 2016 study moving up a whopping 27 positions from ranking 34th to 7th. Performance has been very strong in 2016, with the fund ranking first out of our universe, and See has maintained the fund’s high yield, also ranking first out of peers under dividend income provided in the past five years. Another strong climber is the JOHCM UK Equity Income Fund, which has entered the White List on the back of a stellar year in terms of performance, ranking third out of peers. 
“Whilst already appearing in the top half of the White List in the previous study, the Royal London UK Equity Income and the Threadneedle UK Equity Alpha Fund have both further improved their positioning in the study.  After its strong returns in 2016, the latter fund, run by Richard Colwell, now ranks above the other Threadneedle funds, including the Threadneedle UK Income Fund, which previously ranked fourth, and the Threadneedle UK Monthly Income Fund, which has fallen out of the White List.”

New entrants to the Income Study, and the White List, include Mark Slater’s MFM Slater Income Fund, which, while not performing particularly strongly in 2016, has done tremendously well in terms of performance in previous calendar years. The Majedie UK Income Fund, run by Chris Reid, also follows this trend with most of its strong returns occurring over time rather than in the most recent tumultuous year.

“Our highest climber in the previous study, Colin Morton’s Franklin UK’s Equity Income Fund, has retained its position in the White List. The Fund has had very strong performance versus peers in the previous year but has slightly dropped down in ranking as the income provided in the past five years has been lower versus peers.”

The Grey List saw the top performer in the last study, the Troy Trojan Income Fund run by Francis Brooke, drop 18 places into the Grey List. Its performance has not been as strong as it was previously, most likely due to its quality style bias which has started to move out of favour, and the amount of income the fund has provided over the past five years is much lower than peers.

“Other funds exiting the White List and moving into the Grey List include the Smith & Williamson UK Equity Income Fund, run by Tineke Frikkee, and the Fidelity MoneyBuilder Dividend, run by Michael Clark. Although its volatility remains low, Frikkee’s Fund only just misses out on the White List due to posting a somewhat weaker yield than in the last study and slightly moving down in the performance rankings versus peers.

“The Fidelity Enhanced Income Fund and the FP Miton Income Fund were amongst those which were the largest downward movers in the study. Both funds have struggled in terms of recent performance, but it is worth noting that, despite this, the Fidelity Enhanced Income Fund maintains a very high yield and has the lowest volatility over five years versus peers.
“Conversely Ben Whitmore’s Jupiter Income Trust has continued to have a much stronger time in terms of returns, with the Fund finishing strongly for 2016. This is a respectable change of pace from the poor performance seen historically, particularly in 2015. However, the Fund does not bode well versus peers when comparing the yield which is why it has continued to descend within the Grey List.

“The River and Mercantile UK Equity Income Fund has moved up to now qualify as a Grey List constituent. Performance has been much stronger in the second half of 2016 although volatility remains moderate versus peers.

Turning to the Black List, Sanlam writes that there has been very little change. “Although performance has improved substantially in 2016, the Scottish Widows UK Equity Income Fund ranks last again with the HSBC Income Fund continuing to rank second to bottom.

“The Santander Equity Income Portfolio has unfortunately continued to fall in the rankings. It has seen quite a fall from grace given that it has moved from the White List, to the Grey List and now to the Black List in the last three studies. Performance has continued to be disappointing, volatility has increased and the yield has also dropped.”

Phil Smeaton, CIO, Sanlam comments: “Our Income Study highlights the funds which have been the most successful at producing income for investors over the long term, and which have generated strong returns regardless of market conditions. In these uncertain political and economic times, it is encouraging to see that UK income funds have been only mildly affected.

“The most obvious benefit to UK Income fund investors is on the income side: many UK dividend paying companies are multinationals with significant dollar denominated earnings and revenue. It is also important to note that equities do continue to have an important role to play in income generation, but as evidenced by the change in fund rankings, this has become a trickier and more volatile asset class to navigate than in the past.

“There are potential opportunities that investors can exploit, including reaping larger dividends from the translation effect and investing in stocks at a discount. However, it is also undeniable that the UK is entering an environment which has not been experienced before. The risk of uncertainty is high and there are many questions unanswered about the UK’s exit from the EU which could potentially have a positive or negative effect on the markets.”

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