Best and worst-performing UK equity income funds revealed

A biannual study, which has been running for 30 years, shows significant reshuffling amid dividend dearth.

The latest half-yearly Income Study from Sanlam has revealed the best and worst UK equity income funds, with quite a big reshuffle since the last report as dividends are cut across the marketplace. 

Before the pandemic, £102 billion of cash was on course to be returned to investors as dividends, which would have been the second-highest year on record. But now this forecast has been obliterated as pressures on cashflows translate into dividend cuts and suspensions. Funds trying to deliver an income for investors from stocks have been feeling the pressure, as the study shows. 

The half-yearly Income Study, which has been running for more than 30 years, assesses funds in the Investment Association’s UK Equity Income sector that are more than £20 million in size, monitoring performance over six-month periods. It then puts the 59 eligible funds on its White List, Grey List or Black List depending on how well they have done on the metrics of volatility, performance and income. 

The White List

The White List is home to those funds with proven ability to deliver superior total returns over five years. It has had a shake-up as volatility across the industry has hit fund performance, and this time six out of the first eight funds are new entrants.

The top fund on the White List this time is Robin Geffen’s Liontrust Income, having also taken the top spot in the July 2019 study. 

Completing the top three are Santander Enhanced Income and LF Miton UK Multi Cap Income. After a tough period in 2016, the managers of the Santander fund, Graham Ashby and Duncan Green, have recently proved their worth again, with the fund paying a good dividend recently when compared to peers, Sanlam said. Meanwhile, the Miton fund makes a comeback after dropping into the Grey List at the last review. 

Two new entrants to the White List are BlackRock UK Income and the ES R&M UK Equity Income fund, which jumped 33 and 24 places, respectively, after performing well during this year’s market volatility. Also worth mentioning is Fidelity Enhanced Income, up 32 places in the list. Its high dividend and defensive profile helped it climb up the ranks.    

The White List in full 

Source: Sanlam 

The Grey List

The Grey List is a place where you can find managers with an out-of-favour style who might linger there temporarily, or it can act as an early warning signal for a fund in decline. In the latest study, funds rising from the Grey list to the White list replace others moving in the opposite direction, which include Lazard Multicap UK Income, Royal London UK Equity Income and Allianz UK Equity Income.

ASI UK Equity Income and Threadneedle UK Equity Income both appear near the top of the Grey List, owing to better short-term performance and volatility management.  

After a long spell in the lower rankings of the Black List, the UBS UK Equity Income fund has edged into the Grey List following good income and historic performance.

However, several other funds have fallen quite dramatically within the Grey List. These include Royal London UK Equity Income, Allianz UK Equity Income and Unicorn UK Income.

The Black List

The Black List is home to serial underperformers, and this time the line-up remained relatively consistent, with names including Liontrust Macro Equity Income, HSBC Income, ASI UK High Income Equity, M&G Dividend, Janus Henderson UK Equity and Growth and ASI UK Income Unconstrained. 

The Slater Income came in as a “surprising” entry, having fallen 25 places. The fund has slowly sunk from the White List to the Black List as its investment style and small- and mid-cap bias has seen it struggle in recent challenging markets. 

Premier Miton (LSE:PMI) investors has also been unable to match previous successes in the study. Premier Income and Premier Optimum Income have dropped substantially, continuing their fall since their White List presence in 2018. 

“Long-term dividend growth has certainly benefitted income investors over the last decade, but the big question is whether these payments are sustainable,” says Philip Smeaton, chief investment officer at Sanlam Private Wealth.

“Most of the UK’s largest companies pay dividends, although a disproportionate volume are from just a handful of major industries. Pressure on cash flows has forced companies to slash payouts, in some cases for the first time ever. In many instances, these have been accompanied by share price collapses, which have only added to the pain.

“Small-cap companies have generally faced the greatest challenge within the UK Equity Income sector. Compared with their large-cap counterparts, small caps generally have a domestic bias and more narrowly focused business models. Consequently, they have been at the forefront of underperformance as consumers have stayed indoors and economic activity has generally slowed.”