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How do you judge a good income fund?

Posted by: Brian Dennehy
Membership level: Free

 

Sanlam Private Wealth have recently published their take on the best income funds (a link to the study is included at the bottom of this blog).  As always, we take great interest in any research on income generation.  There’s lots of information around but how should you judge a good equity income fund?  

Sanlam’s study is comprehensive.  But, as with many other industry studies on income generation, it misses a key point that we think is pivotal for income investors: consistency in payout growth.

The Sanlam study uses a mix of 7 factors in determining the funds that they include in the White List, including performance, volatility and income distributed.  However, for income investors, we know – as long-in-the-tooth advisers – that the most important factor for them is the consistency of growth in the income a fund pays out.  

A reliable, growing income will be crucial through a long retirement, especially one where ageing demographics (as well as too much debt) will lead to the Government (and companies) into reneging on pension promises made yesteryear. The choice is between greater self-reliance or impoverishment. 

In table 1 below we have taken the results from the Sanlam White List and we have added the percentage of calendar years the dividend has grown (we excluded funds with less than £50m and fewer than 7 years’ track record).  

In table 2 we show a list taken from our Income Tool sorted by number of years of payout growth in descending order (the Income Tool allows investors to profile their funds based on a number of different criteria and you can try it here).  You can see that there is 1 fund that has increased its payout in 10 consecutive years, 5 funds that have increased the dividend paid out for 9 years, 4 funds that have managed to do this for 8 years. 

Looking at the average payout growth as a %, the White List has an average of 64% (although some funds don’t have data for 10 years) whereas the average for the list produced by the Income Tool is 87%.  

There are some good funds in the White List but some of the highly ranked funds don’t have a long enough track record for us: Slater Income, Marlborough Multi Cap Income and Miton Multi Cap Income are all good but have less than 7 years of data.  JOHCM UK Equity Income stands out with 8 of 10 years of payout growth and is the one common fund between the two lists.  

Income investors should be seeking the best that they can get.  By focussing our research on what income investors tell us matters most to them – consistency of payout growth – it becomes easier to select the best funds.  You can see this when comparing the average number of years that the fund has increased the dividend paid to investors (64% vs. 87%).

Assuming an income objective, here are two funds which stand out in our analysis:

Schroder IncomeAnalysis Save to my funds Add to basket fund has a very good track record, growing payouts in 8 of the last 10 calendar years, including 2016 (+6%).  The fund seeks out companies that are not correctly valued by investors (not just cheap but under-valued without good reason).  This is an approach that has served investors well

JOHCM UK Equity IncomeAnalysis Save to my funds Add to basket, mentioned above, has also managed to grow its payouts in 8 of the last 10 years.  Payout growth for 2016 (+8.6%) was helped by sterling devaluation.  As with the Schroder fund this also has a Value-bias and more than most in small and medium sized companies.

For those who don’t wish to take income, both the Schroder’s and JOHCM funds are outstanding for growth over shorter and longer periods and both are top quintile over 10 years.

ACTION FOR INVESTORS

  • To judge a good equity income fund, you need to adjust your mental focus
  • Many income investors need to change their mindset away from a preoccupation with capital fluctuations and towards one that focuses on the consistency of income payouts
  • Our Income Tool is a great way to profile UK Equity Income funds to find the best one for you based on your requirements.  And to our knowledge it’s the only one out there

FURTHER READING

 

Table 1: White List funds

Fund

Years of payout growth

 

Years of payout growth (%)

JOHCM UK Equity Income

8

out of 10 years

80%

Premier Income

7

out of 10 years

70%

Royal London UK Equity Income

7

out of 10 years

70%

AXA Framlington Monthly Income

6

out of 10 years

60%

Premier Monthly Income

6

out of 10 years

60%

SLI UK Equity Income Uncons

6

out of 9 years

67%

Unicorn UK Income

6

out of 10 years

60%

MI Chelverton UK Equity Income

5

out of 9 years

56%

River & Mercantile UK Equity Income

5

out of 7 years

71%

Threadneedle UK Equity Income

5

out of 10 years

50%

       
   

Average

64%

 

Table 2: FundExpert Income Tool funds

Fund

Years of payout growth

 

Years of payout growth (%)

Troy Trojan Income

10

out of 10 years

100%

Henderson Global Care UK Income

9

out of 10 years

90%

BlackRock UK Income

9

out of 10 years

90%

Rathbone Income

9

out of 10 years

90%

Rathbone Blue Chip Income And Growth

9

out of 10 years

90%

IP High Income

9

out of 10 years

90%

JOHCM UK Equity Income

8

out of 10 years

80%

Liontrust Macro Equity Income

8

out of 10 years

80%

Schroder UK Alpha Income

8

out of 10 years

80%

Schroder Income Fund

8

out of 10 years

80%

       
   

Average

87%

 

Sources

Sanlam White List: http://www.whitelist.co.uk/income-study/ [external link]

Payout growth calculated using Dividend Pay Dates on a calendar year basis.   Funds with less than £50m are excluded.  Funds with less than 10 years of payout growth are not ranked in the Income Tool.  Last update Jan 2017.

Data provided by FE Analytics and FundExpert.co.uk. Care has been taken to ensure that the information is correct but we neither warrant, represent nor guarantees the contents of the information, nor do we accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein.  Where possible, we have contacted fund managers to check data that the data we receive is accurate.


Topic: Generating income


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