All this week we bring you the best income opportunities across the globe, as picked by top fund managers, professional investors and our own stock and fund analysts as part of Morningstar’s Guide to Finding Investment Income.
UK investors looking for regular income have long favoured home-grown companies. According to Morningstar Direct, more than £57 billion is invested in open-end UK equity income funds – despite outflows over the past year.
Thanks to record low interest rates, over the past five years UK equity income has proved one of the most popular fund sectors. Investors who would usually rely on government bonds and cash to provide them with a regular income have turned to UK equity income funds. Inflows into the sector over the past three years have been significantly boosted by a particularly high profile fund launch in June 2016 – when Neil Woodford’s first eponymous fund took £2 billion of investors' cash in just one month.
But the sector is crowded, with more than 120 funds in the Morningstar category. Morningstar’s fund analysis helps to sort the wheat from the chaff, rating 21 UK equity income funds positively – although none hold a Gold Analyst Rating. Of the Silver Rated funds, the following also earn a five-star performance rating, meaning they have outperformed their peers over a rolling three-year period. Investors should note, past performance is no indication of future returns, and funds with a track record of less than three years do not appear.
Royal London UK Equity Income
Royal London UK Equity Income benefits from a highly-experienced manager employing a proven strategy consistently, says Morningstar fund analyst Samuel Meakin.
Martin Cholwill has been at the helm of this fund since March 2005. He has more than 30 years’ experience in the industry and has been managing UK equity-income funds since 1996. His experience, the focus provided by his investment process, and the interaction and idea sharing with other fund managers on the UK equity team at Royal London lessen any concerns over the absence of a dedicated analyst team here.
Cholwill’s strategy is sensible for delivering yield and competitive total returns for investors. He targets stocks with strong free cash flows that thus enhance the prospects of rising dividend payouts; company finances must be strong and cash flows sustainable. Valuation is also important; the manager seeks stocks that are out of favour with the market and thus may offer a premium yield, and he seeks to ensure he’s not paying a hefty valuation to secure income for the fund, which can give it some resilience in falling markets. The yield focus also guides his sell discipline, as stocks that have performed well become less attractive from a yield perspective.
Threadneedle UK Equity Income
Threadneedle UK Equity Income represents a strong choice for investors seeking a balanced approach to both income and growth, says Morningstar fund analyst Simon Dorricott.
The fund is managed using a total return mind-set, with the manager aware of the need to generate both income and capital growth. Manager Richard Colwell is pragmatic in his analysis and looks to take a longer-term view. His holdings tend to fall into two broad categories: cash flow compounders with a consistently high return on common equity and more contrarian ideas where established companies are experiencing short-term difficulties. This gives him the flexibility to invest across growth and value situations and has served investors well over time, with strong performance seen against peers and the index.
Troy Trojan Income
The fund benefits from a seasoned manager who has consistently applied a well-defined, conservative low-turnover approach, says analyst Peter Brunt.
Francis Brooke joined Troy Asset Management in 2004, charged with building its UK equity-income product. The group launched this fund in September of that year with Brooke as the named manager; since then, he has produced one of the strongest track records within the UK equity-income category and delivered a consistently rising dividend distribution.
Brooke constructs a relatively concentrated portfolio of “quality” companies, which have to meet strict criteria before being considered for investment. The focus is on FTSE 350 names, and Brooke tends to maintain a far greater weight in large caps than the category average, providing the strategy a good level of scalability. The focus on quality at the stock level also results in some clear biases at the sector level, and investors can expect a performance profile that can at times look at odds with peers and the FTSE All Share benchmark, over the long term, however, it is one of the most attractive funds on a risk/return basis.
