Fund Calibre MD Darius McDermott looks at five equity income funs that may help match a client’s income requirements.
There are many reasons people invest for income. Some need help to pay their bills, while others want to pay for a dependant’s education or cover the cost of longer-term care. Whatever the reason, few of us would refuse some extra money, especially today with rising living costs putting a strain on many people’s pockets.
Cash still not king
Rising interest rates have been better news for savers because banks and building societies have also been increasing the rates they pay on savings accounts. However, most are still offering significantly less than the 8.7% inflation we are currently experiencing, so the value of your cash is decreasing.
That’s why the UK Equity Income sector is worth a look. It’s full of funds that not only offer the potential for capital growth, but also aim to deliver a steady income to help out a wide variety of investors.
Here we take a look at five portfolios that could be worth considering if you’re wanting your investment portfolio to give you a financial boost.
Retirement planning
Those with one eye on retirement – or who are already there – are finding the economic backdrop very worrying, according to Job Curtis, manager of the City of London Investment Trust. “Higher inflation, jittery financial markets and a mixed outlook for the economy make securing a reliable income more important and more challenging than ever,” he said.
This trust, which predominantly invests in larger UK companies with international exposure, has increased its dividend every year since 1966*. That’s a pretty impressive record! Job, who has been at the helm since 1991, pointed out that anyone making a £1,000 investment in the trust back in 1966 would have yielded a gross income of £46,500 over 56 years.* “Over the same period, a typical savings account paying the Bank of England’s base rate would have paid out just £3,700,” he said*. What’s more, if that investor in 1966 had reinvested their dividends back into the trust, they would be sitting on an investment worth £780,000*!
Job believes the dividend yield of UK equities remains attractive relative to the main alternatives and he’s optimistic about their future prospects. “UK equities continue to be on the receiving end of takeover bids from overseas companies and private equity firms, which is an indicator of the value on offer,” he said.
You can’t predict the future
These may be uncertain times but Carl Stick and Alan Dobbie, who manage the Rathbone Income fund, aren’t trying to predict the future. “We don’t know when or where inflation or interest rates, in the UK, Europe, or the US, are going to peak,” they said. “We don’t know the next calamity or great opportunity just around the corner. But what we do understand is a process that is focussed on risk, which we have learnt over many years. We find that we do best when we see the world through this lens.”
Their multi-cap UK equity income fund is concentrated in stocks with high quality and visible earnings. “Prices have moved on, markets have moved on, so our portfolio must evolve, but our objectives remain the same,” they continued. “We believe that we serve clients who value this risk-adjusted approach to capital appreciation and income growth. This has been a good year so far — indeed the last three years from the early pandemic lows have been strong indeed — but we remain mindful not to rest on our laurels.”
Free cash flows
Companies with robust free cash flow characteristics and strong balance sheets are currently being favoured by Andrew Jones, manager of the Janus Henderson UK Responsible Income fund. He believes these are well positioned to navigate the uncertainty.
“Economic data continues to be less downbeat than was expected and as a result the corporate earnings that have been released this year have overall been well received. With inflation at (or close to) a peak in several countries, there is likely to be scope for less restrictive monetary policy at some point in 2023. The UK equity market still looks attractively valued relative to its history and other major markets,” he added.
The aim of the fund is to provide an income, along with the potential for capital growth over the long term. According to its latest factsheet, the fund has 62 holdings, with the 10 largest accounting for just under a third of the portfolio**. AstraZeneca is the largest individual position with a 6.2% share**.
Outperforming larger caps
Adrian Gosden, who manages the GAM UK Equity Income fund with Chris Morrison, believes dividends are the most important driver of total returns. “Equities in general are a very good tool when you’re investing in an inflationary environment, but the real importance about UK equities is they come with a good dividend,” he said.
The fund’s investment process is focused on valuing and selecting companies based on how much spare cash each business generates – and their ability to make pay-outs with this money. However, Adrian recently noted how the fund was experiencing “a noticeable headwind” for the lack of performance from small and mid-caps, compared to their larger cap FTSE 100 cousins.
“Over the last two years, the FTSE 100 has outperformed the FTSE 250 and FTSE Small cap indices by approximately 30%,” he explained. “We believe that significant value is now available in the mid and smaller shares, and we have tilted the portfolio further to benefit from this anomaly.”
Smaller names
The IFSL Marlborough Multi Cap Income fund is another portfolio that embraces smaller companies, despite rival portfolios steering clear of this area. Its manager, Siddarth Chand Lall, invests in a combination of FTSE 350 names, along with those further down the market capitalisation scale. “Our fund tends to move more in line with the FTSE 250 than large-cap indices, given our bias to small and mid-cap stocks,” he explained.
According to the most recent update, the portfolio’s winners have included Halfords, the car parts and cycles retailer, housebuilder Taylor Wimpey, and insurance company Sabre. In fact, Siddarth pointed out that most smaller companies in the fund had reported trading either in line with – or ahead of – expectations. “Examples include car distributor Inchcape, estate agent Winkworth and vehicle accident management business Redde Northgate,” he said. “We are cautiously optimistic about the second half of 2023.”
*Source: The City of London Investment Trust, Annual Report 2022
**Source: fund factsheet, 30 April l2023
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’s views are his own and do not constitute financial advice.
