those stocks receiving a rise in their income payments of as much as 15%.

Transcription

1 JANUARY 2018 Income Study The chase for income in the UK Many invesrs care only about capital growth and they spend time hunting for funds containing scks which they expect rise in value. Some rush around trying catch falling knives, hoping they will quickly rise again. Others jump in funds holding momentum scks, expecting that they will continue power ahead. Another approach is buy funds with undervalued scks in the hope that the market will eventually recognise their potential. Funds focused on dividends may not seem as exciting at first, yet, in the longer run, dividends can generate a significant return. Those periodic distributions by funds may not look spectacular, but invesrs in UK Equity Income funds can expect receive them year after year. As wellmanaged companies aim regularly increase their dividends, fund invesrs enjoy a rising income. Between 1986 and 2008, invesrs achieved the highest level of income from bond investments. But, by 2010 this changed, and scks became the better yielding investment. Many invesrs in bonds ok refuge in scks, particularly through those funds holding the so-called bond proxy shares. Before the Brexit referendum in 2016, Min Group was expecting average annual dividend growth of around 2% for large cap scks; it now expects around 7%. Today, approximately 75% of FTSE 100 company earnings are generated overseas and several of the companies pay dividends in either US dollars or euros. These overseas earnings consequently become part of the universe available UK Equity Income invesrs through their fund holdings. After the Brexit vote, the sudden depreciation of the pound led invesrs in those scks receiving a rise in their income payments of as much as 15%. In part, the resilience of the UK sck market is due invesr appetite for international scks with foreign, particularly US dollar, earnings. Additionally, the FTSE includes many international companies that are in defensive secrs such as pharmaceuticals and bacco. These companies are attractive invesrs, both because of their overseas earnings and because of the less economically sensitive nature of their operations. At the same time, commodity-related secrs such as oil and gas, and metals and mining, also performed well. They were viewed as being among the chief beneficiaries of the weakness of sterling against the US dollar, as commodities are generally priced in dollars. Invesrs who are motivated purely by the yields currently available through their fund holdings can be drawn in scks that others with longerterm time horizons are avoiding. As managers of income funds seek high-yielding scks, the prices of these scks tend rise and they become an ever-larger proportion of the index. This is exacerbated as risk-blind passive funds are then forced buy more, pushing up the values of high-dividend-paying scks unsustainable levels. The consequence is that many active fund managers become reluctant own what they consider be overpriced scks, which can lead a more defensive strategy being employed. A defensive stance can be achieved through prudent sck picking, which the better UK income fund managers deliver, leading a reduction of beta, or volatility. Given markets have entered what many judge be the late stage of the cycle, a combination of sck picking and a reduction of volatility would seem be the most appropriate solution for UK Equity Income invesrs. Global equity markets posted double-digit returns in 2017, supported by a benign macro environment experiencing a cyclical upswing. Now is a remarkable time for UK Equity Income fund investment, with invesrs having the opportunity own many funds yielding between 4% and 6%. That in itself would be noteworthy at any time, but there is now the added likelihood that interest rates, which have endured almost nine years below 1%, could continue remain low for some time, reinforcing the attraction of UK Equity Income funds. How do we compile our funds lists? Starting with IA UK Equity Income secr statistics, and including only funds available retail invesrs with sufficient track records and size, we undertake a quantitative study. We examine the previous five individual calendar years of performance, five-year standard deviation (volatility) and the tal dividend income distributed over the five-year period. Each of these metrics is weighted using a consistent formula, ranked individually, and then summed identify the funds with the best combination of performance, volatility and income paid.

2 Income yields provide a valuable long-term benefit because reinvested income is the biggest overall contribur tal returns, thanks the effect of compounding. This is described as interest on interest or, more specifically, generating income from previous income which, over time, brings rewards patient income invesrs. There are many good reasons be enthused by the UK Equity Income secr, especially given the poor returns available on cash and bonds, but it is important be sensitive the tal return achievable. The amount of income received is the driving force of many income fund invesrs and, produce the best results, selection of the most suitable funds is critical. Invesrs continue find 4.00% 3.00% 2.00% 1.00% 0.00% MSCI UK MSCI Emerging Markets Global Market Yields in % MSCI Developed Europe our Income Study an essential guide assist them through the selection process. MSCI Asia Pacific MSCI World MSCI USA MSCI Japan Source: Bloomberg, Date: January 2018 THE WHITE LIST: specials The White List has remained relatively stable in the January 2018 Income Study. The majority of the highest ranking funds have remained, with only three of the lower ranking funds moving out of the White List. The LF Min UK Multi Cap Income Fund, run by Gervais Williams and Martin Turner, continues perform strongly, and consequently has retained its first place positioning for the third study in a row. Its high ranking dividend yield versus peers, along with excellent and consistent performance are the reasons why, since qualifying for entry in the study, the fund has only ever placed first. There has been a slight shuffle in the p half of the White List but the p nine have remained consistent, with the strongest performers in the July 2017 study continuing be highly ranked in the January 2018 study. It is worth mentioning Thomas Moore s SLI UK Equity Income Unconstrained Fund, which had quite a dramatic fall in 2016 when it was placed last in terms of performance versus all peers for the period. Since then, the fund has delivered on its mandate and, despite having the highest standard deviation of all peers, due the volatility in 2016, the manager has managed perform consistently in all other years reviewed. This means that the fund continues retain its position in the middle of the White List, even moving up two places in the January 2018 study. Of the three new entrants the White List, the RBS Equity Income Fund was a constituent of the List as recently as January The fund dropped 14 places before moving back up by 13 places this time; performance has been stronger versus peers in the more recent period of review. Other new entrants include the Man GLG UK Income Fund: after moving up 32 places in the July 2017 study, the fund ranked first in performance versus peers in 2017 and has a respectable yield of 5.3%. Thus, the fund has risen another four places secure a position in the White List. This is quite remarkable given that the fund entered our universe in July 2016 and was initially placed at the botm of the Black List; Henry Dixon appears have turned the fund around considerably since becoming lead manager in November Finally, the Lazard Multicap UK Income Fund has crept in the White List, having moved from its position wards the p of the Grey List, due a lower volatility than many of its peers. THE GREY LIST The Unicorn UK Income Fund has once again moved out of the White List. The fund, which has a distinct small/mid cap bias, has had a very strong year in terms of performance, ranking third out of peers within the study. However, in 2016, due the outcome of the UK referendum, the fund was one of the worst performers. This pattern of under and out performance is consistent over previous years o, and has resulted in the fund producing a high standard deviation figure versus peers. It is this volatility which is blame for it falling seven places in the January 2018 study in the Grey List. The Threadneedle UK Equity Income Fund s positioning also worsened in this period. The fund, run by Richard Colwell, still remains the highest ranking Threadneedle fund, but has dropped 18 places in the Grey List. Unlike the Unicorn fund, this is predominantly due disappointing performance in 2017, ranking 52 out of the 60 funds in the study. Threadneedle UK Equity Alpha Income and Threadneedle UK Monthly Income both appear in the Grey List, in positions 35 and 36, respectively. The largest positive mover in January 2018 s income study is the Santander Enhanced Income Fund, which has climbed 21 places from the botm of the Grey List the p of it. The fund has tended pay out a high amount of income and ranked well versus peers under this metric over time; however, this has now been coupled with strong performance in the most recent calendar year. In contrast, the largest negative move witnessed has been from Kevin Murphy and Nick Kirrage s Schroder Income Fund. This fund, whilst producing a respectable amount of income in the July 2017 study, is one of the poorest income payers in the January 2018 edition. Furthermore, performance has been somewhat disappointing and the resultant volatility is relatively high. This firm s enhanced income version, the Schroder Income Maximiser Fund, positions higher at 25 due the additional income that the fund has delivered. Sanlam Private Wealth Income Study JANUARY 2018

3 THE BLACK LIST As with the p scorers, there has not been a wide divergence amongst the botm ranks. The Black List continues have the same under-performers with the exception of two funds. The first is the Ardevora UK Income Fund which has dropped in the Black List for this study, after previously having a solid position in the middle of the Grey List. Performance is the key driver for its 28 place fall as both 2016 and 2017 have been challenging versus peers. The second fund is a new entrant, the UBS UK Equity Income Fund, which, similarly Ardevora, has shown disappointing performance versus peers over the period reviewed. Laggards that continue appear near the botm of the Black List include the Scottish Widows UK Equity Income Fund, the HSBC Income Fund and the Aberdeen UK Equity Income Fund. IMPORTANT INFORMATION All performance figures used in this document are provided by Morningstar and are quoted on a bid price bid price basis (mid mid for OEICs) ie ignoring initial charges, with income (dividends) reinvested. Past performance is not a reliable indicar of future results. The value of unit trusts/oeics, and the income from them, can go down as well as up. You may not get back all that you originally invested, particularly in the case of early withdrawal. Invesrs may be subject an initial charge. Any tax reliefs referred are those currently available. Their value depends on the individual circumstances of the invesr. Levels and bases of, and reliefs from, taxation may change. The value of investments may also rise and fall purely as a result of exchange rate changes. In accordance with Financial Conduct Authority rule requirements, we have published a policy which sets out how we manage conflicts of interest. This policy is available on request from our Head of Compliance, or may be viewed on the Conditions section of our website: This newsletter is based on information that we believe be reliable, but is not guaranteed as accuracy and completeness by Sanlam Private Investments (UK) Ltd. Information on individual funds is given without taking in account readers specific circumstances and requirements and does not constitute investment advice under the Financial Services and Markets Act. Remember, the Income Study is not personal advice based on your circumstances or a recommendation. If you are unsure about the suitability of an investment for your circumstances please contact an FCA authorised financial adviser. THE WHITE LIST Top fourteen funds by overall merit Dividend yield Income 5 years 31/12/17 (Based on 100 investment) 01/01/2017 Total return capital growth and income reinvested 01/01/ /12/ /01/ /12/ /01/ /12/ /12/2013 Volatility Fund % % % % % % LF Min UK Multi Cap Income AXA Framlingn Monthly Income Marlborough Multi Cap Income Slater Income Royal London UK Equity Income SLI UK Equity Income Unconstrained MI Chelvern UK Equity Income Majedie UK Income Premier Monthly Income RBS Equity Income JOHCM UK Equity income Premier Income Man GLG UK Income Lazard Multicap UK Income White List Average Notes: (a) Funds are ranked using seven different criteria based on performance, volatility and the income distributed, with the most recent period of performance receiving a greater weighting. (b) All funds are in the IA UK Equity Income secr. (c) Performance data is provided by Morningstar on a bid--bid basis with income reinvested. Volatility is annualised. (d) Yields sourced from Morningstar, FT and fund providers and represent the estimated annual payout. (e) Funds with a value of less than 20m are excluded.

4 THE GREY LIST Dividend yield Income 5 years 31/12/17 (Based on 100 investment) 01/01/2017 Total return capital growth and income reinvested 01/01/ /12/ /01/ /12/ /01/ /12/ /12/2013 Volatility Fund % % % % % % Franklin UK Equity Income Aviva Invesrs UK Equity Income FP Min Income Unicorn UK Income Artemis Income Santander Enhanced Income MI Downing Monthly Income Old Mutual UK Equity Income F&C Responsible UK Income Troy Trojan Income Schroder Income Maximiser Rathbone Income Santander Equity Income Threadneedle UK Equity Income Smith & Williamson UK Equity Income Kames UK Equity Income River & Mercantile UK Equity Income Fidelity MoneyBuilder Dividend JPM UK Higher Income Liontrust Macro Equity Income Threadneedle UK Equity Alpha Income Threadneedle UK Monthly Income Jupiter Income Trust Allianz UK Equity Income Schroder UK Alpha Income BlackRock UK Income Newn UK Income SLI UK Equity High Income L&G UK Equity Income Fidelity Enhanced Income Janus Henderson UK Equity Income & Growth Schroder Income Grey List Average THE BLACK LIST Dividend yield Income 5 years 31/12/17 (Based on 100 investment) 01/01/2017 Total return capital growth and income reinvested 01/01/ /12/ /01/ /12/ /01/ /12/ /12/2013 Volatility Fund % % % % % % LF Canlife UK Equity Income Neptune Income NFU Mutual UK Equity Income Ardevora UK Income AXA Framlingn Blue Chip Equity Income Castlefield BEST Income General UBS UK Equity Income Invesco Perpetual Income & Growth F&C UK Equity Income M&G Dividend Rathbone Blue Chip Income And Growth Scottish Widows UK Equity Income HSBC Income Aberdeen UK Equity Income Black List Average Past performance is not a reliable indicar of future results.

5 Don t forget your ISA! As opportunities reduce your tax bill become increasingly scarce, it becomes ever more important utilise your ISA allowance each year. For the current tax year, all invesrs can subscribe up 20,000 in a scks and shares ISA. Dividend income within an ISA is tax-free. The upper rate of capital gains remains at 20%, but investments held within an ISA wrapper remain exempt. An added benefit is the freedom switch the funds held in your ISA at any time, which gives you the opportunity follow future Income Study analysis. Investing in the White List Investing in the White List Portfolio ISA is the simplest way invest in the White List funds. This portfolio, which is actively managed by SPW, holds a selection of the best UK equity income funds which have featured in the White List. Once you have filled in the application form there is no more paperwork complete. We collect all the dividends for you and can pay them your bank account. However, many of our clients prefer use the Income Study assist in the selection of their own funds. If you would like details of any of our preferred funds, please get in uch. So, if you want make a new investment, take out an ISA or switch from an underperforming fund, dealing through SPW is simple: call us on We offer a personal service and do not have a call centre. Past performance is not a reliable indicar of future results. Remember, the Income Study is not personal advice based on your circumstances or a recommendation. If you are unsure about the suitability of an investment for your circumstances, please contact an FCA authorised financial adviser. Sanlam Private Wealth Income Study JANUARY 2018

6 Issued by Sanlam Private Wealth 5 Miles s Buildings, George Street, Bath BA1 2QS Tel: I Fax: E enquiries@privatewealth.sanlam.co.uk Sanlam Private Wealth is a trading name of Sanlam Private Investments (UK) Ltd which is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales Registered office: 16 South Park, Sevenoaks, Kent TN13 1AN. is