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Equity income funds: don't throw the baby out with the bathwater

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Equity income funds have long been "the potato of the investment world", forming a versatile base for an investment portfolio. Unlike other types of investment, equity income funds pay dividends (income for you) as well as growing over time. Spot on for people who want to get some regular cash payouts from their investments. (Read more about how they work.)

 

Recently, however, they've been getting a bad wrap

The news hasn't been kind to equity income funds lately, owing to the disappointing performance of one particular high-profile fund. But new figures from Willis Owen suggest investors who ditch this type of fund altogether could miss out on market-beating returns. 

It's an interesting take. So... watchu talkin' bout, Willis?

 

We share below the full press release from Willis Owen, in their own words. Be aware we haven't fact-checked it or done our own due diligence.

 

Equity income funds: Don't throw the baby out with the bathwater

Investors who ditch equity income funds following a recent spate of bad press risk missing out on returns far in excess of the market, according to Adrian Lowcock of Willis Owen.

The equity income sector has come under intense scrutiny in recent weeks, which may cause investors to flock to other investment types for decent returns.

But new figures from Willis Owen reveal the best equity income funds have produced returns far in excess of the market over the past decade.

On average, equity income investors have achieved returns of more than 145% in the past 10 years, compared with the 136% return achieved by the FTSE 100.

But investors who backed the best-performing equity income fund of the past decade, Unicorn UK Income, have achieved a return of 338% - nearly 2.5 times that of the FTSE 100.

 

Top ten equity Income funds for income

Fund

Income Return

Unicorn UK Income in GB

146

Premier Optimum Income in GB

122

Royal London UK Equity Income in GB

114

M&G Charifund in GB

107

Fidelity Enhanced Income in GB

100

Janus Henderson UK Equity Income & Growth in GB

100

Premier Monthly Income in GB

100

Schroder UK Alpha Income in GB

99

AX Framlington Monthly Income in GB

99

Janus Henderson UK Responsible Income in GB

98

Source: FE Analytics from 31st May 2009 to 31st May 2019. Income Return (Total Return – Price Return) in Pounds Sterling

 

Top ten equity income funds for total return (growth & income)

Fund

Income Return

Unicorn UK Income TR in GB

338

MI Chelverton UK Equity Income TR in GB

326

Royal London UK Equity Income TR in GB

233

Janus Henderson UK Equity Income and Growth TR in GB

213

Janus Henderson UK Responsible Income TR in GB

204

JOHCM UK Equity Income in GB

200

Standard Life Investments UK Equity Income Unconstrained in GB

194

Man GLG UK Income in GB

190

Schroder Income in GB

183

Rathbone Income TR in GB

181

Source: FE Analytics from 31st May 2009 to 31st May 2019. Total Return in Pounds Sterling

 

5 tips for picking the best equity income funds

1. Decent yield

Equity funds should have a yield at least the same as the index or more likely slightly higher. If an equity income fund has a low yield then it might have more of a growth focus to it and be riskier. Likewise a high yield could suggest investments in companies where dividends are not secure. There is no one size fits all answer as there are periods when dividend yields might be high or low. But if the yield is skewed to one extreme it raises warning signs.

 

2. Consistency of dividends

Companies which pay a dividend are often deemed lower risk and for income seekers a dividend yield which is consistent is often a sign of a manager being focused on investing in company’s which protect their dividends and are well covered by earnings


3. Diversified Income

An equity income portfolio should have income coming from the majority of the portfolio investments with only a few low or non-yielding investments.

 

4. Consistent style

As with any investment fund an equity manager should have a style which is well defined and strictly adhered to.

 

5. Don’t ignore capital return

Companies which pay dividends may be ex-growth or grow slower but a good dividend payer can grow its dividend which in turn will help drive share prices higher.

 

Adrian Lowcock, head of personal investing at Willis Owen, adds:

“Equity Income has been getting a bad press recently. Investors have been more focused on growth so the sector has suffered a period of underperformance in recent years, even so the power of dividends and compounding means the sector continues to hold its own over the long term.”

“This is the power of equity income, it isn’t a get rich quick approach but the investment strategy allows for steady returns for investors. It is hard to know when the markets return to income stocks but in the meantime investors can benefit from some excellent managers in this space.”

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