One in four UK equity income funds cut payouts in 2016

Kyle Caldwell
7 February 2017
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One in four UK equity income funds cut their payouts to investors last year, new research has found.

According to Fundexpert.co.uk, who crunched the numbers, this represents the largest number of 'income sinners' since 2012, emphasising the need for investors to tread carefully when deciding on their fund choice.

Out of a total of 59 UK equity income funds examined, 15 cut their payouts.

The table below highlights the 10 worst sinners, with Schroder Income Maximiser (payouts -15.6% down), Insight Equity Income Booster (-8.7%) and Aberdeen UK Equity Income (-5.1%) having made the biggest cuts.

Saints and sinners

But in the case of the worst two fund performers, income payout growth is not the focus.

The funds target a set high yield year to year, and are designed to cater to the needs of investors who want immediate income at the expense of capital growth.

These specialist funds employ a special technique that involves the use of derivatives in order to achieve their target income.

In the 'income saints' list, Unicorn UK Income tops the charts, delivering 17.5% payout growth, followed by Man GLG UK Income (17%) and Newton UK Income (15.7%).

Brian Dennehy of FundExpert points out that Unicorn UK Income cut its dividend in 2015, so is therefore less consistent on that front compared to other funds.

 

Consistency

Dennehy named Troy Trojan Income as the most consistent fund, as the fund has increased its payouts every year over the past decade.

No other UK equity income fund managed to achieve the feat, although five came close, having upped their payouts nine times out of 10: BlackRock UK Income, Henderson Global Care UK Income, Rathbone Income, Rathbone Blue Chip Income & Growth and Invesco Perpetual High Income.

In stark contrast, the vast majority of UK equity income investment trusts have managed to raise their payouts over the past decade. This is because trusts can hold back up to 15% each year, which means they can build up a reserve to bolster dividend payouts in leaner years.

During the financial crisis the majority of UK equity income investment trusts were able to either maintain or increase their dividends, as they dipped into their reserves. In contrast, virtually all of the UK equity income open-ended funds cut their dividends.

"It is vital that an income fund should prioritise growing its payout, excluding the "maximiser" fund type," says Dennehy.

Here's why: if you are in a fund increasing its income by 10% a year, your "income will double in seven years. But if you are not monitoring your fund choices closely, and your fund is only increasing payouts by 5%a year, it will take 14 years to double - that is a huge hit through a long retirement."

Equity income funds sorted on years of payout growth

FundShorter-term consistency Longer-term consistency
 2016 payout growth (%)10yr payout growth (%)Years of payout growth
Troy Trojan Income3.156.210 out of 10
BlackRock UK Income15.253.9Nine out of 10
Henderson Global Care UK Income5.536.2Nine out of 10
Rathbone Income2.728.1Nine out of 10
Rathbone Blue Chip Income and Growth2.440.9Nine out of 10
Invesco Perpetual High Income0.658.4Nine out of 10
Artemis Income14.244.5Eight out of 10
Fidelity Moneybuilder Dividend10.352Eight out of 10
JPM UK Higher Income8.637.9Eight out of 10
JOHCM UK Equity Income7.6173.7Eight out of 1

Equity income sinners for calendar year 2016*

FundShorter-term consistencyLonger-term consistency 
 2016 payout growth (%)3yr payout growth (%)Years of payout growth
Schroder Income Maximiser-15.6-7.3Four out of 10
Insight Equity Income Booster-8.71.2Three out of 10
Aberdeen UK Equity Income-5.1-1.3Seven out of 10
Old Mutual UK Equity Income-4.51Six out of 10
HSBC Income-4.44.8Six out of 10
Neptune Income-3.22.8Six out of 10
Aviva Investors UK Equity Income-2.219.2Seven out of 10
F&C UK Equity Income-2.1-10.9Six out of 10
Invesco Perpetual UK Strategic Income-1.710.3Seven out of 10
Threadneedle UK Equity Income-1.655Five out of 10

*Sorted on 2016 payout growth

This story was originally written for our sister magazine, Money Observer.

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