It has not been an easy time for income investors and the latest bi-annual Sanlam study highlights how difficult a job income fund managers have at the moment.
Before the pandemic, shareholders were set to receive a hefty £102 billion in dividends this year. That forecast has now of course been obliterated as pressure on cash flows has forced companies to slash payouts (in some cases, for the first time ever, as for Royal Dutch Sell which cut its dividend for the first time since World War 2).
Navigating the dividend environment in the disruption has been challenging, as consumers have stayed indoors and the economy has shuddered to a halt. The Investment Association (IA) has responded by temporarily suspending dividend yield targets for funds in its UK Equity Income sector. Concerns about income have seen investors pull some £591 million out of equity income funds in June alone, according to Morningstar data.
Despite that, Sanlam's twice-yearly study of equity income funds shows that some have managed to perform even despite the volatility and are still delivering an inflation-beating income.
Sanlam’s report looks at performance over a five-year period, taking into account factors such as volatility and income paid out. The top funds make the coveted “White List”, while the worst performers are put onto its “Black List”.
The White List
Leading the pack is the four-star rated Liontrust Income Fund, run by Robin Geffen, which moved up by 18 places since the last report. The fund yields 5.3% as of June 30 and has provided an income of around £250 over five years based on a £1,000 investment. “This fund has delivered solid performance over several years, and has fared well during the recent volatile period,” says the report. “Key to its success has been its overall consistency across the study’s criteria, which are volatility, income and performance.”
In second and third position are four-star rated Santander Enhanced Income and five-star rated LF Miton UK Multi Cap Income, which yield 5.3% and 4.1% respectively. The funds have provided an income of around £300 and £190 over five years, also based on a £1,000 investment. While the Santander fund is a regular feature of the White List, the Miton fund has jumped 17 places, moving out of the mediocrity of Sanlam's Grey List.
Meanwhile, Blackrock UK Income and ES R&M UK Equity Income - both four-star rated - are first-time entrants to the top performers list. “Top-quartile volatility outcomes over five years versus peers, and good performance during the volatility of 2020 have helped to secure White List placings for these two funds,” says the report.
The Black List
At the other end of the spectrum is Premier Income, which topped the “Black List” of worst performing equity income funds. Despite a decent yield of 6%, the fund is down 15.9% over the past year. It has dropped 35 places in Sanlam's tables and a sharp turnaround in performance over the past six months means the fund also finds itself on our own list of funds which went from first to worst.
In second position is the two-star rated Slater Income Fund, having fallen 25 places, mainly attributable to poor performance high volatility when compared to peers. Over the past few studies, the fund has slowly sunk from the White List into the Grey List, and now the Black List, ”as its style and small- to mid-cap bias have hampered any recovery in the recently challenging market”.
Meanwhile, some familiar names continue to languish in the Black List, such as three-star rated Liontrust Macro Equity Income, two-star HSBC Income and ASI UK High Income Equity.
But the future for dividends and income investors is still uncertain. “Long-term dividend growth has certainly benefitted income investors over the past decade, but the big question is whether these payments are sustainable,” says Philip Smeaton, chief investment officer at Sanlam Private Wealth. “Most of the UK’s largest companies pay dividends, although a disproportionate volume are from just a handful of major industries. In many instances these have been accompanied by share price collapses, which have only added to the pain.”
