Three UK income funds to consider
Why the UK for income?
With a yield of 4.3%, the UK market currently offers one of the highest yields in the world.
Companies such as Royal Dutch Shell, HSBC and GlaxoSmithKline account for a large proportion of this yield, underscoring how a number of UK income funds can give you exposure to some world-leading businesses.
Jason Hollands, managing director at Bestinvest, said: “Market valuations have become more attractive recently and there is significant scope for a share price uplift if investor sentiment improves, but the market currently offers a yield of 4.3% even if it doesn’t. This appears incredibly attractive, both in absolute terms and relative to other regional equity markets and to bonds.”
In comparison, the Europe excluding UK region is yielding 3.9% and the US is yielding 2.1%. 10-year UK government bonds, known as gilts, are yielding 1.3%.
Three fund picks
Here, the Bestinvest researchers reveal their top UK equity income funds and reasons to back them:
Threadneedle UK Equity Income – yield 3.9%
“We believe that this is an excellent fund for income investors. It is run by the experienced and capable Richard Colwell, with the support of a well-resourced team.
The approach to selecting portfolio companies focuses on identifying key themes driving the market at any time, for example restructuring or recovery opportunities, and then selecting stocks that should benefit from these themes.
Colwell is generally cautious at the moment and has built his portfolio around an ‘engine room’ of solid businesses offering resilient dividends. He supplements this with selected recovery names –poorly performing businesses such as Morrisons and GlaxoSmithKline that might be riskier but offer greater potential returns.”
TB Evenlode Income – yield 3.5%
Manager Hugh Yarrow’s high conviction approach to investing mainly focuses on quality stocks that provide a sustainable and growing dividend with a valuation overlay. Despite the quality bias, the portfolio will typically have some exposure to more cyclical areas of the market.
Yarrow’s style has historically translated into a significant exposure to consumer goods, technology and industrials, while carrying less weight in the financials, mining and oil and gas sectors.
“The fund has demonstrated strong downside protection over its history and has been less volatile than the market and the peer group. Investors should note that the fund has a yield broadly in line with the market, as Yarrow runs it with a total return mindset. Consequently it sits in the UK All Companies sector rather than the UK Equity Income sector.”
Trojan Income – yield 4.4%
“This UK equity income option invests predominantly in larger UK stocks and selected overseas businesses. The fund follows the Troy house approach of focusing on capital preservation, so manager Francis Brooke favours quality, defensive companies and may also make use of cash if he believes the market to be overvalued.
“This approach is reflected in its performance – during the turbulent markets of recent years it has been one of the least volatile funds in the sector, but also one of the top performers.
“While the income from the fund may have historically been lower relative to the UK income peer group, Brooke places a lot of emphasis on growth in the income stream – with the fund delivering dividend growth in every year since launch, with the exception of 2009.”