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Saints and Sinners: 2016 Income Fund Review

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Consistent growth in income paid to investors is THE vital component for income seekers.  Not capital growth, volatility, or charges.  

Consistent income growth is THE sole irreplaceable ingredient.

If you are looking for income then this blog is for you (and if you aren’t, you will be at some point, so it’s still worth reading).  Here is our annual review of UK equity income funds, highlighting the Saints and Sinners from 2015.  This knowledge can ensure that you maximize income payouts from their fund choices in the years ahead.

In addition, the 2015 results are added to our unique 10 year analysis, encapsulated in our Income Tool, which quickly enables you to identify the most consistent funds based on your priorities.  These numbers will be updated in the Income Tool next week and we will alert you, so income investors can conduct their annual review.

There are 43 UK equity income funds which we analyse, excluding those with short histories.

Most Analysis Far Too Gloomy

The regular macro level dividend analysis produced by investment banks and others has been far too gloomy for years.  First worrying about banks, then currency moves, then about supermarkets and oil companies and now commodity companies.  

The reality for income investors has been regular income growth, PROVIDED that they intelligently selected an active fund manager.

Too many funds still disappointed, but the best are very good.

Here are the key takeaways:

  • The stock market ended 2015 down (as it did in 2014).  Despite that fall, the average equity income fund in our analysis grew its payout by 6.72%...
  • …this followed payout growth of 7.14% for 2014, 4.97% in 2013 and 9.04% in 2012.
  • The Sinners: 18% of funds cut payouts in 2015.  This was 22% in 2014, 19% in 2013, and just 10% in 2012.
  • Of all the funds profiled here 32% (14 funds) haven’t rebuilt their payments since their prior peaks in 2008/9 or before.
  • The worst Sinners are Unicorn UK Income and Jupiter Income Trust, with falls in excess of 10% for their 2015 payouts vs. 2014.
  • Investors picking the better funds (our Saints) enjoyed annual payout growth of between 9.6%-75.6% with an average of 24.35% (this is up from 19.6% in 2014)

We noted last year that Unicorn’s high payout was partly thanks to special dividends received in the year and that investors should be not be lured by the high payout.  This is evident in the poorer performance this year.

It is the consistency in payouts over the years that is the key measure of success and one that income investors should concentrate on – see last 2 columns in the tables below.

The BIG risk?

The big risk is investor inertia.

For example, if you are in a fund increasing its income by 10% per annum your income will double in 7 years.  But if you are not monitoring your fund choices closely, and your fund is only increasing payouts by 5% per annum it will take 14 years to double – many will not even be this good.

The risk specific to 2016 comes from the markets themselves.  

The bubble-like nature of US stock market valuations coupled with a rising interest rate environment means that even a relatively small negative event, such as rumblings in the Chinese casino, could trigger significant falls.  The S&P has already suffered its worst 4-day start to the year on record.  

Sharp falls in the US would be mirrored in the UK, which could lead to payout cuts by nervous CEOs such as occurred in 2008/9 (off 30% in many cases).  That is rare but that doesn’t mean it can’t happen twice in 10 years.  

Income levels with many (but certainly not all) funds have been rebuilt since 2008/9, and 55% of the funds we analysed had their largest payout in 2015.  This is very encouraging but the ongoing risk to capital and dividends still needs to be understood.

Still, the fund managers (at least those who do prioritise growth in their payouts) are cautiously hopeful.  For example, the JOHCM team that manage the UK Equity Income strategy are “cautiously optimistic” for 2016, anticipating dividend growth in low single figures.

Their fund generated a decent level of growth in 2015 (though not enough to appear in the top 10 below) in spite of over-weights to oil and mining stocks and under-weight to defensive stocks.  

ACTION FOR INVESTORS

  • Keep an eye out for any laggards in your equity income funds
  • Be aware that changing income funds is slightly more complicated due to the dates when dividends are paid.  We will do a blog on that in the coming weeks, so keep an eye out for it.

FURTHER READING

 

Table 1: Saints and Sinners (sorted on 2015 growth)

The Saints

       
 

Shorter-term consistency

Longer-term consistency

 

2015 growth

3 yr growth

Years of payout growth

Out Of this number of years

SLI UK Equity Income Uncons

75.58%

22.56%

6

8

Allianz UK Equity Income

40.24%

5.42%

7

10

Santander Equity Income

40.08%

19.11%

5

10

Royal Bank of Scot Eq Inc

17.94%

56.02%

7

10

Old Mutual UK Equity Inc

13.99%

33.81%

7

10

Aviva Investors UK Equity Income

12.54%

21.92%

8

10

Halifax UK Equity Income

11.65%

18.31%

9

10

CF Canlife UK Equity Income B Inc

11.24%

85.38%

7

10

Lazard Multicap UK Income Retl Inc

10.67%

15.31%

7

10

Royal London UK Equity Income

9.55%

84.02%

7

10

 

 

 

The Sinners

       
 

Shorter-term consistency

Longer-term consistency

 

2015 growth

3 yr growth

Years of payout growth

Number of years

Unicorn UK Income A

-25.09%

35.21%

6

10

Jupiter Income Trust

-11.64%

-4.58%

6

10

Newton UK Income

-5.90%

-19.52%

4

10

Threadneedle UK Gr and Inc

-3.21%

24.38%

7

10

Schroder Income Maximiser A Inc

-2.44%

61.26%

4

9

Premier Monthly Income A

-2.10%

-1.63%

6

10

Fidelity MoneyBuilder Dividend

-0.73%

38.21%

7

10

Liontrust Macro Equity Income R Inc

0.12%

48.24%

8

10

Aberdeen UK Equity Income A Inc

0.86%

6.58%

7

9

Insight Equity Income

1.27%

11.86%

7

10

 

 

 

Notes:

Our research below includes all funds in the UK Equity Income sector that have 7 years or more of dividend payout data.

At the time of publishing data for F&C UK Equity Income and Scot Wid MM UK Equity Inc not updated for full year 2015

Topic: Fund analysis


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