Three top-performing UK income funds you may not have heard of
Recommended ‘buy lists’ collated by online platforms are often dominated by multi-million pound funds run by household names.
One area awash with such funds is UK Equity Income, which is regularly the top selling sector among individual investors who often prioritise generating an income.
This sector is home to the likes of Woodford Equity Income (£8.72 bn), Artemis Income (£6.59 bn) and Threadneedle UK Equity Income (£3.22 bn). These three funds combined account for 34% of total assets in a £55bn sector.
The popularity of these funds is understandable. They are run by talented managers who have delivered great long term returns. (See table below)
However, there are other, perhaps less well-known, UK equity income funds, also delivering stellar returns for investors.
“[These are] smaller funds from lesser known houses that may not have big marketing budgets or be household names but whose performance numbers have nevertheless been impressive,” says Jason Hollands of Tilney Bestinvest.
Here, Hollands picks three “underdog challengers” to the big beasts of the UK Equity Income sector:
1) Ardevora UK Income
Performance: Outperformed the FTSE All Share Index by 32% and delivered 70% over the five years to the end of April 2016
Ardevora is a small fund management boutique founded by former Liontrust fund managers Jeremy Lang and William Pattinson in 2010.
Their investment approach draws heavily on psychology in the search for stocks to own and to identify those to avoid. They argue that company management teams are prone to excessive ego-driven risk taking, so unusually they don’t meet company managers in person and focus instead on analysis of balance sheets and cash flow statements, avoiding stocks where management team behaviour looks risky and shows signs of hubris.
They also think shareholders tend to over-react to short term news, so look for companies which may be subject to high levels of anxiety which have pushed their valuations too low. Another bias they focus on is the over-confidence of investment analysts in their ability to forecast accurately, which can mean they are slow to recognise when they have got things wrong, so the Ardevora team looks for growth companies with the capacity to positively surprise.
2) Evenlode Income
Performance: Outperformed the FTSE All Share Index in each of the last five years and trounced the FTSE All Share by 38% over this period, to deliver a total return of 79%
The Evenlode Income fund is run by Hugh Yarrow and Ben Peters. The approach on the fund is to invest in a concentrated portfolio of around 30 “cash compounders”, quality businesses that are able to generate high returns on capital and with strong free cash-flow, without the need for debt. These are typically large and mid-sized UK-listed companies that currently include the likes of Unilever, Diageo and GlaxoSmithKline.
Although the fund invests at least 80% in UK listed companies, it also includes some US holdings such as Microsoft, Procter & Gamble and Johnson & Johnson.
3) Unicorn UK Income
Performance: Delivered a blistering five year total return of 84%, beating the FTSE All Share Index by 42% but with lower volatility than the index
Unicorn Asset Management is a small boutique, focused exclusively on UK equities and with a particularly strong pedigree in smaller company investment.
While most UK equity income funds invest primarily in larger companies, the Unicorn UK Income fund is biased primarily towards smaller companies, but also has mid-cap exposure, so can help diversify an existing portfolio of more traditional large-cap skewed UK equity income funds.
The fund is managed by Fraser Mackersie and Simon Moon and top holdings include BBA Aviation which provides refuelling and ground handling services to private, business and commercial aircrafts at locations across the globe; brewer and pub operator Marston’s, the world’s largest brewer of cask ale and Secure Trust Bank.
Returns on £100 – source: Tilney Bestinvest