Income Study JANUARY 2015

Transcription

1 Income Study Maggie (Magdalena Maria) Laubser ( ), detail from Poplars, n.d. ( ), oil on cardboard, Sanlam Art Collection. JANUARY 2015 Following the runaway market of 2013, the year of 2014 saw little movement in UK equity indices, with invesrs left in close proximity where they started the year. The Bank of England was notable in its inactivity, deciding not raise interest rates, despite a move having been widely anticipated at the start of the period. But this apparent calm masked a great dispersion between and within global equity markets, which became a defining feature of Whilst the US produced another year of double-digit returns, invesr trepidation re-emerged in Greece, where the sck market fell some 30. The likes of Spain and Italy were, however, spared the contagion fears of previous episodes and finished the year in positive terriry. After a sustained period of relative stability, market volatility became a hot pic in the second half of the year, providing, in theory at least, a more fertile hunting ground for active fund managers. We have in the past often made reference the ability of equity income funds grow their dividends over time. In the current low interest rate environment, this is particularly important. Fixed income investments such as bonds have been a traditional source of income for invesrs. In simple terms, the return invesrs can expect from a fixed income security is the prevailing interest rate plus a premium for the risk associated with lending the issuing entity. If interest rates rise from day s low levels, the return invesrs demand will increase; as bonds pay a fixed rate of income, this can only be accommodated if the current price of the bond falls. To put it another way, bond prices move in the opposite direction interest rates. Some argue that rising interest rates can be bad for equities o. The argument here is that, as interest rates rise, the returns available on interest-bearing accounts (and bonds) become more attractive. This leads invesrs draw money out of equity and put it in such accounts, precipitating a fall in equity prices. Higher interest rates may also encourage consumers save more money rather than spend it, which has a potentially negative impact on the economy. However, we are, of course, not in a normal economic cycle. Central bankers in the UK and abroad have made clear that any change in interest rates will be predicated on the health of the economy, and if the economy picks up, it is equity invesrs who are set benefit. At this point it is useful distinguish between the behemoth dividend producers, including many of the country s largest businesses that have made up the traditional hunting ground for equity income invesrs, and the smaller, higher growth companies that are more sensitive the wider economy. The White List has representatives from both styles. It is worth noting that at times there may be a greater preponderance of one than the other, reflecting what the recent economic drivers have been. A portfolio comprising both thus brings useful diversity benefits, even within this particular market secr. Two key considerations for equity income invesrs in a rising rate environment are the degrees of safety in dividends and in capital value. With any increase in interest rates being linked an improving economic backdrop, capital values will have some support if interest rates rise. The potential for earnings improve on the back of a pickup in the economy also offers support for dividends. Moreover, the prevailing conditions of the past five years have seen companies build up large cash positions on their balance sheet, offering further support for future dividend payments. WEALTH MANAGEMENT I INVESTMENT MANAGEMENT I STOCKBROKING I OFFSHORE SERVICES BATH I HARROGATE I KIRKBY LONSDALE I LONDON I MARLOW I NEWCASTLE I SEVENOAKS I TEESSIDE 1

2 Moving the p of the List this time is Royal London s UK Equity Income fund. Martin Cholwill has read both the economy and the sck market extremely well through A bias wards medium-sized companies in economically sensitive areas of the market has moved his Royal London UK Equity Income fund up a further two places claim the p spot. John McClure, manager of the Unicorn UK Income fund, sadly passed away in June Fraser Mackersie and Simon Moon, co-managers of the fund, ok up the reins. Since then the fund has slipped down the rankings. This appears more a function of underperformance from the small cap secr the fund invests in rather than due the change of management. Fraser and Simon continue manage the fund with the same strong disciplined approach that John McClure instilled in them, giving comfort in future returns. The White List Specials The PFS Chelvern UK Equity Income fund run by Davids Horner and Taylor also focuses on small capitalisation scks. From second last time, it o slid seven places down the rankings. This seems confirm the small cap income secr has done less well relative mid and large cap names. The secr retains its attractions. Of the funds on the White List, Chelvern and Unicorn have delivered the highest yield over the last year. A new entrant on the list, in joint third place, is the Evenlode Income fund managed by Hugh Yarrow and Ben Peters. It has just achieved a 5-year track record, bringing it in the scope of the survey for the first time. The fund focuses on high quality names; businesses they see as offering an attractive combination of high and growing cash flows and low fundamental business risk. The team has done an excellent job of generating an attractive reward from such relatively low risk businesses. Also in third place is the Rathbone Income fund managed by Carl Stick. The fund has benefitted both from its 50 exposure non-ftse100 companies, and, in a volatile year for equities, Carl s disciplined focus on what can go wrong with each investment, has brought distinct benefits. Axa Framlingn Monthly Income is the second highest new entrant on the List. The fund is managed by George Luckraft. Just over half the fund is invested outside of the FTSE100; smaller companies, such as FTSE Fledgling Index scks, are included. This brings some liquidity concerns, but as the fund is a modest 137million in size, these are not excessive at this time. 2

3 The Grey List The most notable entrants the grey list come from opposite ends of previous studies. Long-time White List incumbent the JOHCM UK Equity Income fund has slipped some way down the rankings. Despite their accurate forecast of weaker returns for the market through 2014, Clive Beagles and James Lowen failed turn this in successful investments. Large exposure the energy and natural resource secrs seems have been the main issue for the team, with much of the pain being felt in the latter half of the year. Newn Higher Income has moved the other way. It is up 30 on the list from 40 previously, despite a number of changes in manager and process in the last few years. Perhaps this is a sign of better things come. Chrispher Metcalfe has been in charge since March and most of the outperformance has come in the last six months or so. It is early days though. The Black List Again there seems little suggest the Scottish Widows UK Equity Income fund will experience a brighter future. It remains one of the weakest performers over the last year and that keeps it pegged firmly the botm of the list. It is notable that 9 of the 10 funds that filled the lowest positions on the fund last time remain there this time. Performance wise, Aberdeen UK Equity Dividend fund (previously SWIP UK Income) has not ranked higher than 40th (of 53 names currently) in each of the last 5 years, leaving it second last on the list, and only marginally better than the Scottish Widows fund. We note that, despite still placing at the p of the Black List, BlackRock UK Income has been the third best performer in the study over the last year, marking a significant improvement since Mark Wharrier ok the helm in November The Jupiter Income Trust has also escaped from the Black List, though remains not far from it. 3

4 Don't forget your NISA! Investing in the White List As opportunities reduce your tax bill become increasingly scarce, it becomes ever more important utilise your NISA allowance each year. For the current 2014/15 tax year, all invesrs can subscribe up 15,000 in a scks and shares NISA. For income tax, whilst all dividends are subject a 10 non-reclaimable rate, if you hold them within a NISA there is no further income tax pay. Outside a NISA they would be subject your p marginal rate of income tax. The upper rate of capital gains remains at 28, but investments held within a NISA wrapper remain exempt. An added benefit is the freedom switch the funds held in your NISA at any time, which gives you the opportunity follow future Income Study recommendations. Investing in the White List Portfolio NISA is the simplest way invest in the White List funds. This portfolio, which is actively managed by SPI, holds a selection of the best UK equity income funds which have featured in the White List. Once you have filled in the application form there is no more paperwork complete. We collect all the dividends for you and can pay them your bank account. However, many of our clients prefer use the Income Study assist in the selection of their own funds. If you would like details of any of our preferred funds, please get in uch. Remember, we are usually able offer very substantial purchase discounts the terms normally available private individuals. So, if you want make a new investment, take out a NISA or switch from an underperforming fund, dealing through SPI is simple and inexpensive: call us on We offer a personal service and do not have a call centre. THE W HITE LIST Past performance is not a reliable indicar of future results. Issued by Sanlam Private Investments (UK) Ltd 5 Miles s Buildings, George Street, Bath BA1 2QS I Tel: I Fax: Tel: +44 (0) I Fax: +44 (0) Registered office: 16 South Park, Sevenoaks, Kent, TN13 1AN enquiries@spi.sanlam.co.uk www. spi.sanlam.co.uk Sanlam Private Investments (UK) Ltd 1 Sanlam Private Investments Wealth Management (UK) Ltd 2 Trading as Sanlam Private Investments. Authorised and regulated by the Financial Conduct Authority. Registered in England and Wales ( , ). WEALTH MANAGEMENT I INVESTMENT MANAGEMENT I STOCKBROKING I OFFSHORE SERVICES BATH I HARROGATE I KIRKBY LONSDALE I LONDON I MARLOW I NEWCASTLE I SEVENOAKS I TEESSIDE

5 THE WHITE LIST Top fourteen funds by overall merit Net dividend yield Net income 5 years Total return capital growth and net income reinvested Volatility Fund (Based on 100 investment) Royal London UK Equity Income A Threadneedle UK Eq Alpha Inc RN GBP Evenlode Income A Inc Rathbone Income R Inc AXA Framlingn Monthly Income R GBP Inc Threadneedle UK Eq Inc Ret Net GBP Unicorn UK Income A Inc PFS Chelvern UK Equity Income A Inc SLI UK Equity Income Uncons Ret Inc Threadneedle UK Monthly Inc RN GBP Troy Trojan Income I Inc Fidelity MoneyBuilder Dividend Old Mutual UK Equity Income Inc Premier Monthly Income A White List Average (See explanary notes and important information below). Notes: (a) (b) (c) (d) (e) Funds are ranked using seven different criteria based on performance, volatility and the income distributed, with the most recent period of performance receiving a greater weighting. All funds are in the IMA UK Equity Income secr. Performance data is provided by Morningstar on a bid--bid basis with net income reinvested. Volatility is based on five-year performance data. Income is calculated based on 100 invested five years ago. Yields sourced from Morningstar, FT and fund providers and represent the estimated annual pay out. Funds with a value of less than 20m are excluded. IMPORTANT INFORMATION All performance figures used in this document are provided by Morningstar and are quoted on a bid price bid price basis (mid mid for OEICs) ie ignoring initial charges, with net income (dividends) reinvested. Past performance is not a reliable indicar of future results. The value of unit trusts/oeics, and the income from them, can go down as well as up. You may not get back all that you originally invested, particularly in the case of early withdrawal. Invesrs may be subject an initial charge. Any tax reliefs referred are those currently available. Their value depends on the individual circumstances of the invesr. Levels and bases of, and reliefs from, taxation may change. The value of investments may also rise and fall purely as a result of exchange rate changes. In accordance with Financial Conduct Authority rule requirements, we have published a policy which sets out how we manage conflicts of interest. This policy is available on request from our Head of Compliance, or may be viewed on the Conditions section of our website: co.uk. This newsletter is based on information that we believe be reliable, but is not guaranteed as accuracy and completeness by Sanlam Private Investments (UK) Ltd. Recommendations for individual funds are necessarily made without taking in account readers specific circumstances and requirements and do not constitute investment advice under the Financial Services and Markets Act. Accordingly, readers may wish seek proper professional advice before acting on any information contained in this newsletter. Remember, the Income Study is not personal advice based on your circumstances or a recommendation. If you are unsure about the suitability of an investment for your circumstances please contact an FCA authorised financial adviser. 5

6 THE GREY LIST Net dividend yield Net income 5 years Total return capital growth and net income reinvested Volatility Fund (Based on 100 investment) Schroder UK Alpha Income A Inc F&C Responsible UK Income 1 Inc Rathbone Blue Chip Income & Growth R Inc IP Income & Growth Inc Fidelity Enhanced Income Inc Franklin UK Equity Income A Inc Artemis Income Inc AXA Framlingn Blue Chip Eq Inc R Inc Smith & Williamson UK Equity Inc Trust JOHCM UK Equity income B GBP Inc Premier Income A RBS Equity Income AXA Framlingn Equity Income GBP R Inc St James's Place Allshare Income Inc Liontrust Macro Equity Income R Inc Newn Higher Income GBP Aviva Invesrs UK Equity Income SCA Santander Equity Income Min Income Inc Schroder Income Maximiser A Inc Lazard Multicap UK Income Retl Inc Allianz UK Equity Income A Jupiter Income Trust Ignis UK Equity Income Inc Schroder Income Inc Grey List Average THE BLACK LIST Net dividend yield Net income 5 years Total return capital growth and net income reinvested Volatility Fund (Based on 100 investment) BlackRock UK Income A Inc NFU Mutual UK Equity Income B Aberdeen UK Equity Income A Inc River & Mercantile UK Equity Income A CF Canlife UK Equity Income B Inc GBP Santander Enhanced Income Ret Inc F&C UK Equity Income 1 Inc Kames UK Equity Income A Inc SLI UK Equity High Income Ret Inc JPM UK Higher Inc A Inc Neptune Income A Inc M&G Dividend A Inc Aberdeen UK Equity Dividend A Inc Scottish Widows UK Equity Income A Inc Black List Average Past performance is not a reliable indicar of future results. 6 is