And the winners of the UK Income awards are...
BEST LARGER FUND
1-year return: 5.6%
3-year return: 37.2%
The impressive track record of Schroder Income has earned it Rated Fund status for the past two years, and it scoops its first gong in our awards this year, as Best Larger UK Equity Income fund.
Managers Kevin Murphy and Nick Kirrage apply the same investment approach to this £1.9 billion fund as they have used with great success on the £1.2 billion Schroder Recovery fund. For them, it’s all about the price they pay at entry. Their investment process starts with a number of valuation screens. They aim to identify companies that are trading at significant discounts to their perceived fair values and take a three- to five-year view on the stocks they are buying.
The key difference here is a focus on dividends. They are ideally looking for stocks with a high dividend yield and income growth. Unlike many peers, they are willing to invest in companies that have cut their dividends, if they believe it reflects an inflection point in the company’s strategy and share price.
Significant deviation from its FTSE All-Share benchmark in terms of the sectors and sizes of companies to which it is exposed has resulted in shorter periods of underperformance, though its performance looks remarkably steady of late. The core discipline of buying cheap stocks tipped for a turnaround gives good long-term outperformance and a decent level of income.
Returns consistently put the fund in the first quartile of its sector and the fund has a yield of 4%. Income is paid half-yearly.
HIGHLY COMMENDED LARGER FUND
Robin Geffen has produced consistently good and lower-risk returns for investors in Neptune Income. He holds a concentrated portfolio of stocks, but minimises risk by diversifying across sectors and buying put options to profit when markets fall.
Holding each stock in equal measure guards against overreliance on any particular stock and limits dividend risk. The top 10 holdings account for just over one quarter of income.
Put options reduce risk to capital. These helped to shield the fund from the pounding shares received at the end of 2018, although held it back during the rebound in early 2019. Geffen has since sold options on the Nasdaq and S&P 500 indices in the US, but maintains FTSE 100 puts to shield the fund from potential Brexit-induced volatility.
Buying cheap stocks tipped for a turnaround pays off
BEST SMALLER FUND
1-year return: 9.1%
3-year return: 28.0%
Investec UK Equity Income earns a place in our Rated Funds and awards this year, thanks to its superior returns both in absolute terms and on a risk-adjusted basis.
Blake Hutchins has run the fund since launch in early 2015 and his preference for capital-light businesses has stood him in good stead. He focuses on cash-generative, attractively valued, quality businesses with low capital intensity and the ability to compound returns and cash flows over the long term, while returning a proportion of this growing cash flow back to investors in the form of rising dividends.
This means he avoids some of the UK’s biggest dividend payers like HSBC, Royal Dutch Shell and BP. These tend to be capital-intensive businesses and none of them has grown its dividends in dollar terms over the past three years.
He typically favours two types of investment opportunities. The first is ‘quality compounders’ – capital-light businesses that have the ability to compound and grow their cash flows and, therefore, their dividends. An example of this is IntegraFin, owner of the Transact platform used by financial advisers, which he bought in 2018 when it made its initial public offering – an unusual move for him. He also likes ‘positive change’ companies, which are usually driven by an exceptional management team.
Hutchins takes a total return approach that combines income and capital growth. He focuses on sustainable dividend growth as opposed to the absolute dividend yield, and the fund’s yield is lower than many competitors at 2.3%. The portfolio is relatively concentrated with 30 to 50 holdings.
HIGHLY COMMENDED SMALLER FUND
Allianz UK Equity Income is runner-up in this category with very similar three-year performance and consistently above-average dividend yield. Long-term manager Simon Gergel believes UK shares are cheap, posing a fertile environment for stockpickers like him.
He focuses on solid businesses with good prospects for growth, attractive dividends and valuable assets. He invests with an eye on valuation, favouring companies that are temporarily out of favour so have greater upside potential.
Gergel has managed both the fund and The Merchants Trust, an investment trust with which it has significant overlap, since 2006.
Their top 10 holdings predominantly feature big blue-chip financials, oil and tobacco firms, such as HSBC, Royal Dutch Shell and British American Tobacco.
‘Quality compounders’ and ‘positive change’ to the fore