UK Equity Income sector: A blend of tradition and performance

One of the largest Association of Investment Companies’ sectors is UK Equity Income, with 19 funds and more than £12bn assets under management.

The funds in this sector invest in the shares of larger quoted UK companies for both capital growth and income and typically have over 80% of their assets invested in quoted UK shares. The investment companies in the sector aim to generate returns from both capital growth and income, with the majority of investments in the upper end of the FTSE100 index.

The funds’ dividend yield is typically close to the average market yield, and are UK-benchmarked. The investment trusts in this sector predominantly have a value investment strategy, seeking companies that are undervalued in the market but have solid fundamentals. However, some of the funds do focus on growth stocks that offer capital appreciation in addition to dividends.

• CT UK High Income Trust: A solid choice for income and growth
• Law Debenture success driven by manager’s value-driven approach
• Share buybacks: the inside story from Redwheel’s Ian Lance

Diversity and pedigree

In terms of pedigree, the sector is quite diverse, with the Dunedin Income Growth [LON:DIG] being the grandfather of the sector, tracing its origins back to 1873, but it is joined by several other funds that date back to the nineteenth century. At the other end of the spectrum is Premier Miton’s Diverse Income Trust [LON:DIVI], founded in 2011. However, most funds in sector have investment histories of over half-a-century.

Size-wise the funds are also diverse, the largest being Janus Henderson’s City of London Investment Trust [LON:CTY] boasting assets of GBP2.3bn. While most of the funds are plus-GBP350m mastodons, given their vintage and investment philosophy, there are some smaller funds, with the sector minnow being the BlackRock Income & Growth fund [LON:BRIG] at GBP48.5m.

Below are three funds that top the performance charts over one-, five- and 10-years respectively.

AIC UK Equity Income Sector Performance:

Over the longer term Law Debenture, a fund The Armchair Trader covered a few months ago, takes the plaudits, being top in class over five-years and 10-years by some distance. The next-best longer-term options are Finsbury Growth in second over 10-years, a distant 51.2 percentage points behind Janus Henderson’s Law Debenture.

Over three-years the Edinburgh Investment Trust [LON:EDIN], managed by Liontrust with a 57.8% return takes the silver medal. Edinburgh is another one of the funds in the sector that predates the Boer War and was launched when Preston North End was winning the English Football League and Wisden Cricketer’s Almanac Cricketer of the Year published its first edition.

Newer and smaller funds perform well over short-term

Over shorter periods however, some of the newer and smaller funds are having their day, with three-out-of-five of the funds (Temple Bar, abrdn Equity Income Trust [LON:AEI], and abrdn sister fund, Shires Income [LON:SHRS], Columbia Threadneedle High Income Trust [LON:CHIB] and Lowland Investment Trust [LON:LWI], another Janus Henderson fund), being sub-GBP200m funds and three-out-of-five being launched within the average lifespan of a UK citizen, which may be a reflection to the less unwieldy nature of the newer funds, or their relative exposure to more modern sectors.

Redwheel Asset Management’s GBP400m Temple Bar fund leads the line over the past year, with portfolio managers, Nick Purves and Ian Lance, said Redwheel: “[…] employing a long-term approach with an investment philosophy that aims to preserve capital and deliver growth by focusing on a company’s ‘intrinsic value’”. It seems that Purves and Lance’s long-term approach is having short-term gains. That said, with a dividend yield of 3.6% against a sector average of 4.1% and five-year dividend growth of 1.8% against a sector average of 3.1% on the dividend side of the balance, Temple Bar disappoints when compared to the average fund in sector.

The UK Equity Income sector remains a cornerstone of the investment trust landscape, offering a balance of capital growth and income through a variety of approaches. While long-standing giants like Law Debenture and Finsbury Growth continue to demonstrate resilience over the long term, newer and more nimble funds such as Temple Bar are proving their worth in shorter timeframes. With diverse strategies, strong dividend histories, and deep-rooted pedigrees, the sector provides a broad range of opportunities for investors seeking income and growth from UK equities.

UK Equity Income Sector: featured investment trusts

Income Growth Fund plc

AIC: UK equity income LON:SCF / GBP