UK equity income funds used to be the most popular sector among individual investors – pulling in billions of pounds, managed by household names and forming the core of millions of investors’ portfolios.
In 2014, UK equity income funds attracted £2.7 billion of cash. In 2015, the funds pulled in £677 million. But last year saw an about turn in popularity for the sector; investors pulled £3 billion out of UK equity income funds in 2016. And – despite good performance – the negative trend has continued this year. UK equity income funds have been the least popular sector in 2017, according to data from Morningstar Direct.
Investors in the UK have pulled £1.9 billion out of UK equity income year to date. This outflow has extended their longest monthly outflow streak since May last year – totalling a whopping £6 billion. UK equity income funds have £85 billion under management in May 2017.
Within the sector, worst hit was Invesco Perpetual High Income, with outflows of £491 million. Mark Barnett manages the fund, and his two other funds Invesco Perpetual Income and Invesco Perpetual UK Strategic Income also saw withdrawals, £281 million and £130 million, over the same period. All three funds are Bronze Rated by Morningstar analysts.
The second least popular fund in the sector is the Bronze Rated Artemis Income fund with £374 outflows in the first five months of the year while Scottish Widows Multi-Manager UK Equity Income came the third with £351 million outflows.
Why Have Investors Shunned Funds?
“Year-to-date fund flows out of the UK equity income category may reflect concerns over the current uncertainty about the economy. Following on from the EU referendum in 2016, investors’ worries will have undoubtedly been compounded by the outcome of the recent snap election, where no party attained a majority,” said Peter Brunt, senior equity analyst with Morningstar.
Poor performance in 2016 may also be the reason why investors withdrew their money out of UK equity income funds, as the average performance of the category significantly underperformed the FTSE All Share’s 16.75% gain in 2016, Brunt said.
“In 2017 to the end of May, however, the category average has actually marginally outperformed the index, returning 9.11% against 8.16%. A lot of this relative performance can be attributed to fund managers’ underweight to giant-caps and overweight allocation to mid-cap stocks. The FTSE 250 ex Investment Trusts gave a return of 5.08% against the FTSE 100’s 19.07% in 2016, and gained 11.94% against the FTSE 100’s 7.30% return in 2017 to the end of May 2017. The UK equity income category still provides a positive absolute return of 8.61%,” said Brunt.
Domestic stocks in general have proved unpopular; UK flex-cap equity funds and UK large-cap blend saw £610 million and £475 million outflows respectively in 2017.
IP Income Suffers Post Woodford
In October 2013, Invesco Perpetual High Income’s then fund manager Neil Woodford who had worked at Invesco Perpetual for 25 years announced his departure from the firm. Over the following 12 months, many investors cashed in the High Income and Income funds which had each delivered a total return of more than 10% a year for the last decade.
Total assets of IP High Income have gone from £13 billion in October 2013 down to £11 billion in May this year. However, the fund remained the largest fund in the UK equity income category, in terms of fund size. Assets of IP Income have gone from £10 billion in October 2013 to £5 billion in May 2017.
Despite these losses, the High Income fund gained 9.6% and 9.3% in 2014 and 2015 respectively, both outperforming its FTSE All-Share Index by 8%.
Morningstar’s Brunt believes that Mark Barnett has so far proved a worthy successor to Woodford over the past two years. “He has done a good job managing an asset transfer on what was an unprecedented scale and has continued to produce strong relative returns on this fund. We continue to monitor his success in making macro calls in the new setup and his ability to successfully manage the strategy given the level of assets. For now, the fund comfortably retains a Morningstar Analyst Rating of Bronze,” said Brunt.
Woodford Fund Sees Small Outflows
Woodford Equity Income has accumulated assets of £10 billion since launch in June 2014. The fund is Silver Rated by Morningstar analysts.
The fund saw some outflows in first five months of the year of £101 million. Morningstar’s Brunt said the fund manager Neil Woodford applies the same investment approach with which he created an impressively strong and consistent track record during his near three decades at Invesco Perpetual.
