3 UK Equity Income Funds to Boost Your Pension

Morningstar fund analyst Daniel Vaughan highlights three UK equity income funds that are paying a growing, sustainable dividend to supplement investors' retirement income

Emma Wall 17 April, 2015 | 11:45AM
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Emma Wall: Hello and welcome to the Morningstar Series, Ask the Expert. I am Emma Wall and here with me today is Daniel Vaughan, Morningstar Analyst.

Hello, Daniel.

Daniel Vaughan: Hi there.

Wall: So we're here today to talk about U.K. equity income funds. They can play an important role in a post-retirement portfolio because now we're looking for other sources of income, now we don't have to buy annuities.

Vaughan: That's right. There are three funds I'd like to talk about today and they have a common objective. Their managers are trying to construct a portfolio which will create a yield, which is at a premium to the market. They are trying to provide a dividend income, which is growing over a year-on-year basis, and they are also trying to provide competitive total returns.

Wall: And that point about growing dividends is very important because of course although we have low inflation now, inflation could come back in and so by growing that income it's a sort of inflation hedge.

Vaughan: Exactly.

Wall: So what's the first fund today?

Vaughan: So the first fund, I'd like to talk about is the JO Hambro U.K. Equity Income fund, it's managed by Clive Beagles and James Lowen. These guys are very much in partnership. They've been together for 15 years previously at Newton and they joined JO Hambro together. They've run this fund for 10 years, created a very nice track record over that time. They rank top decile in the peer group.

Wall: And JO Hambro retained fund manager as well, don't they because of those things you've just talked about, which – when we're talking about U.K. equity funds, of course, we should probably mention Neil Woodford, can't let this video go without that, who left Invesco Perpetual. Of course he has had great success with his new eponymous group. But for an investor hearing that a fund manager group likes to retain its managers is important, it stops you worrying.

Vaughan: Through the years JO Hambro has had a very stable group of portfolio managers. They've been able to attract experienced people to them because of the way they've been set up and we view it as a good model for an investment management firm.

Wall: What's the second fund today then?

Vaughan: So the second fund I would like to talk about is the Royal London UK Equity Income fund, Martin Cholwill's fund. Martin is a very seasoned U.K. equity income manager. He has run money in his style since 1996 and has actually been in the business since the 80s, started running money – U.K. money in the early 90s. So he has seen a lot of different market conditions. And his approach has been other than slight evolution – sensible evolution in our view has been pretty consistent through time. He has focused on strong cash flow generation to support dividends is absolutely crucial when he is picking his stocks and this has served him really well. His another funds, 10-year track record, top decile over the period, he has run the fund.

Wall: And then that sort of performance history is an important one to consider because – I am not saying anyone could have run U.K. equity the last five years, but it would have been considerably easier to run U.K. money when the market is rallying.

However, over that time period you've talked about he has seen two big rallies and also two pretty speculator bursts and he has weathered them well?

Vaughan: Absolutely right.

Wall: And what's the third fund?

Vaughan: So the third fund I'd like to talk about is Stephen Message's Old Mutual Equity Income fund. Stephen is one of the less experienced U.K. equity income managers we cover, but he does have the support of a strong team, U.K. income – the U.K. equity team headed Richard Buxton one of the most seasoned U.K. investors around and the support of a strong group both providing ideas for his fund and also some guidance on the top down strategic elements of his portfolio construction. He builds the portfolio from a core of yielding stocks, but he is also able to go into more growth oriented names in order to make sure the total return of his portfolio is competitive over time.

We like the group, as a whole, because the way they incentivize their managers over longer time periods and require them to defer their bonuses into their funds. So it stacks up well on that front.

Wall: Daniel, thank you very much.

Vaughan: Pleasure.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
JOHCM UK Equity Income A GBP Acc5.35 GBP-0.22Rating
Merian UK Equity Income L GBP Acc  
Royal London UK Equity Income A816.31 GBP0.42Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar

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