Brexit blunts returns for UK equity income funds

Nerves over Brexit resulted in a UK equity income fund sell off during the first quarter of 2018.

UK equity income funds sold off during the first quarter of 2018 as investor nervousness over Brexit and its implications for large domestic-focused companies reached new heights.

The latest Bank of America Merrill Lynch global fund managers’ report showed the biggest ever negative positioning towards the UK equity market since the survey started in 1999 – making UK equities the most unloved in almost 20 years. A net 42 per cent of respondents are underweight UK equities.

UK equity income funds are bearing the brunt as investors fear that Britain’s departure from the EU will hit big domestic names that are typically the country’s largest dividend-payers the hardest, as the laggards among our model portfolio constituents show (see table). 

Five out of the bottom 10 Money Observer Rated FundsAxa Framlington Monthly Income, City of London Investment Trust, MI Chelverton UK Equity Income, Premier Optimum Income and Rathbone Income – are in the UK equity income sectors.

-Article 50 one year on: how have UK funds fared?

As investors pile out of investment trusts and open-ended funds that invest in the UK income stocks, historically wide discounts have opened up in many investment trusts in the sector. Some have moved close to double-digit discount territory – levels not seen since the financial crisis.

Trusts managed by Mark Barnett, Neil Woodford’s successor as head of UK equities at Invesco Perpetual, have fallen particularly out of favour. At the end of March, his Edinburgh Investment Trust was trading on a discount of 9.4 per cent – wider than 9.2 per cent in October 2008. His Perpetual Income & Growth trust is on the same discount.

Investors’ rejection of UK domestic stocks has drawn Barnett to them, but their continued lack of popularity coupled with heavy share price falls from some of his major holdings (notably Provident Financial, the subprime lender engulfed in crisis) have seen his funds sink to the bottom of the league tables.

Our India and Hotel portfolios ousted his open-ended Invesco Perpetual Income fund at our 2017 annual review in favour of Man GLG UK Income, which has performed very well since Henry Dixon took over in October 2013. It adds more exposure to income shares that are not among the UK market’s ‘mega caps’, which should stand these portfolios in good stead.

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