The 14 ‘best in class’ UK equity income funds

Over the past nine months billions of pounds has flown out of the Investment Association’s (IA) UK Equity Income sector, with investors casting their nets further afield amid concerns over the impact Brexit will have on the UK economy and the wider stock market.

But as the most recent instalment of the Sanlam Income study shows; there are juicy yields available in the sector, ranging between 4 per cent to 6 per cent. Moreover, while dividend growth for the UK market is expected to cool in 2018, underlying growth is expected to be robust, with Link Asset Services pencilling in an increase of 5 per cent. 

As ever, the challenge facing fund investors is which fund to pick. Thankfully help is at hand, in the form of the Sanlam Income Study, which ranks funds in the UK Equity Income sector using certain criteria. The study, which has been running for three decades, analyses absolute returns generated over five years, capital growth over one year, as well as their volatility.

It then categorises funds into three lists: The ‘White List’ presents funds that have established their ability over five years to produce superior total returns.

The ‘Grey List’, which can be a temporary home for a manager with an out-of-favour style or an early warning signal for a fund in decline. And finally, the “Black List” is for consistent underperformers. 

The White List 

Below we take a close look at the White List, which comprises 14 ‘best in class’ funds. 

As the table below shows LF Miton UK Multi Cap Fund is at the top of the list. Its high-ranking dividend yield is supported by its consistently strong performance. 

The last column is total return - capital growth and income reinvested

In second spot is AXA Framlington Monthly Income, which was the least volatile fund in the entire IA UK Equity Income sector. 

Taking third position is Marlborough Multi Cap Income, followed by Slater Income. Both funds look outside the usual suspects in the FTSE 100. 

Completing the top five is Royal London UK Equity Income, a regular in the White List, which is updated twice a year. 

In fact, this time around there have only been three changes.  RBS Equity Income, Man GLG UK Income and Lazard Multicap UK Income have all been promoted to the White List from the Grey List after seeing an upturn in performance. 

-Will the last bear in the room please stand up?

Two funds exited the White List: Unicorn Income and Threadneedle UK Equity Income. Sanlam notes the Unicorn Income fund had a poor 2016 and as a result its risk-adjusted returns has become more volatile than peers, while Threadneedle UK Equity Income posted sluggish performance last year, ranking 52 out of 60 funds. 

Philip Smeaton, chief investment officer at Sanlam UK, says: ‘Given the current low interest environment, there is a lot of reasons to be excited about UK equity income funds, with a number of them currently yielding between 4 per cent and 6 per cent a year. 

‘One element that makes the income market attractive is the UK’s exposure to overseas earnings. A large proportion of large cap companies in the UK generate their earnings from overseas, with some benefitting even further by paying dividends in dollars or euros. While Brexit has presented a challenge to the UK economy, the sudden depreciation of sterling has meant those stocks have increased income payments.’  

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