We look at the biggest and most popular products
Thursday 04 Jul 2019 Author: Steven Frazer

Dividends have always been important to investors. While there are many retail enthusiasts both willing and able to conduct the necessary research on individual income stocks, deciding for themselves what’s right for their own needs and portfolios, there are plenty of others with neither the time to spare or inclination to do so.

That makes UK income funds a popular choice for mainstream retail investors, tapping into the pools of experience and expertise of a management team that is able to do the legwork for them while still earning a decent return on their capital.

These dividends can be taken out as income for those, say in retirement, on bi-annual, quarterly or even monthly basis, depending on the fund, or reinvested to boost longer-term returns for those still working and saving for the future.

The UK equity income funds space is large and diverse yet some funds seem to attract investors like moths to a flame. Here we will look at some of the UK’s biggest and most popular open-ended UK income funds, measured by asset under management (AuM), sometimes called assets under administration (AuA).

UK DIVIDENDS HEALTH CHECK

When it comes to income yield the UK stock market certainly packs a punch. The benchmark FTSE 100 index currently yields 4.5%, making it look pretty attractive in both absolute terms and when compared with other mature global stock markets, and even bonds.

For example, the S&P 500 in the US yields 2.4%, according to Refinitiv data. Even European and Japanese equities struggle to match the payouts on offer in the UK.

For example, the Euronext 100, a collection of leading corporates across Europe, like Airbus, LMVH, Heineken, Renault and Ubisoft, yields 3.2%, while Japan’s Nikkei 225 will net investors only 2% a year.

The yield on 10-year Gilts stands at a measly 0.8%, or just shy of 0.6% for the three-year Gilt.

UK dividends also look reasonably secure, by and large, backed as they are by huge payouts from some of the world’s biggest companies, such as Royal Dutch Shell (RDSB), HSBC (HSBA), Unilever (ULVR) and AstraZeneca (AZN).

Though on the flip-side this does mean income is dependent on just a small collection of stocks.

Partly this is because dividends have been strengthening for many large cap UK listed companies in recent years, particularly in sectors like mining, oil and gas and among the once embattled banks.

RECORD PAYOUT 2019

The latest Divided Dashboard report from investment platform AJ Bell Youinvest shows that FTSE 100 companies are expected to pay £91.2bn in dividends to shareholders in 2019. That would be a record even after estimates were trimmed from £93.7bn at the start of the year following some big ticket payout cuts - Vodafone (VOD) and Marks & Spencer (MKS) spring to mind.

‘The dividend yield on offer may be one reason why the FTSE 100 has risen by around 10% this year, despite all of the prevailing political and economic uncertainty’, says Russ Mould, investment director at AJ Bell Youinvest.

So there are definitely attractions in the UK income space and there may also be logic to following the herd into the most popular funds.

HUNTING WITH THE PACK

In his 2005 book The Wisdom of Crowds James Surowiecki illustrated the notion that a group’s judgement can be surprisingly on the money. Surowiecki’s work can be traced back to observations made by Francis Galton, the cousin of Charles Darwin.

Galton noted the impressive accuracy of the average of all entries in a ‘guess the weight of the ox’ competition at a country fair in 1907, which not only beat most of the individual guesses but also those of alleged cattle experts. This is the essence of the wisdom of crowds – the average judgement converges towards the correct solution.

By this measure picking a UK income fund that is very popular with other investors might make sense.

Different fund managers will take different approaches to income investing. Some focus on larger companies that are seen to be more stable and have paid regular dividends for many years. Others invest in higher-risk small and medium-sized companies. These might pay a lower income to start with, but have more growth potential.

FUNDS IN FOCUS

Let’s take a whistle-stop look at the biggest funds in the UK income space. Standing head and shoulders ahead of the pack is Artemis Income (B0MTK82) with some £5.6bn of AuM.

This fund targets income stocks likely to increase payouts over time so that the fund can do likewise. That necessarily implies a certain amount of capital growth to support rising dividends drawn from mainly UK investments but not just ordinary shares. It also gets creative by assessing preference shares, convertibles and fixed interest bonds.

Top holdings include oil majors  BP (BP.) and Royal Dutch Shell, drugs developer GlaxoSmithKline (GSK) and several financial services organisations.

Run by Richard Colwell for almost a decade Threadneedle UK Equity Income (B8169Q1) is also a firm believer in the pharmaceutical industry’s ability to keep cranking the cash machine to feed a steady stream of dividends. AstraZeneca and GlaxoSmithKline are its two biggest single stakes at 8% and 5.9% of the fund respectively.

Not exclusively UK-based, the rough £4bn fund invests at least two-thirds of its assets in shares of UK companies but will also consider buying non-ordinary equities and bonds. Industrial and consumer goods names are also heavily represented in the top holdings, such as parts distributor Electrocomponents (ECM) and Marmite-maker Unilever (ULVR).

Banks feature strongly in the portfolio of JOHCM UK Equity Income (B95FCK6), which aims to generate long-term capital and income growth through active management of a portfolio of UK equities.

High street names Lloyds Banking (LLOY), HSBC and Barclays (BARC) are all in the fund’s top 10 largest stakes, while sizeable holdings in Standard Life Aberdeen (SLA) and Aviva (AV.) really cement its big call on financial services.

But JOHCM is also a very firm believer in the oil industry’s payout prospects, where BP and Shell account for almost 16% of the portfolio between them.

Vodafone is another stake that really stands out with the fund’s management clearly retaining faith in the mobile phone network’s longer-term capital and dividend growth hopes despite it recently slashing its annual payout.

BEYOND THE BACKYARD

Yet there are enough political and economic questions swirling around UK investment markets to make it worthwhile for investors to glance beyond their UK equities backyard, especially given the relative growth potential of, say, the US stock market.

The S&P 500 is clearly a favourite income and growth hunting ground for BNY Mellon Global Income (B7S9KM9), where nearly half the portfolio is pitched (44%).

Top names include networking technology giant Cisco Systems and Qualcomm, the Snapdragon microchip designer that powers many of the world’s billions of smartphones.

For the real belt and braces investor there are also some very popular fixed-income bond funds to consider, the largest five we have listed in the table.

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