It should come as little surprise that the UK equity income sector, like the UK equity asset class as a whole, has been battered by outflows this year. With the UK’s life after the EU still far from certain and the fate of the Theresa May-led government similarly shaky, it’s no wonder investors have been divesting their funds to regions with stronger economic data and less political baggage.
But the UK equity income sector’s outflows have far exceeded the negative net flows garnered by small, mid and large-cap UK equity funds so far this year.
Data from Morningstar puts the UK equity income sector’s total redemptions at £4.6bn ($6.1bn, €5.1bn) versus its total UK equity category’s outflows of £2.1bn.
So, what is it about the sector that has made it just so damn unlovable?
On a relative performance basis, the sector is not the weakest of the Investment Association’s developed market equity categories over the past 12-months.
Over the last 12 months, the sector has produced total returns of 12.55% in sterling terms, besting the IA North America and North American Smaller Companies categories but trailing the IA European Smaller Companies’ 30.06% gain quite considerably.
That said, the sector has generated a barrage of bad press over the last 12 months, with Neil Woodford’s mega £8.3bn fund, currently the bottom performer of the sector, at the centre of much of it.
But Jason Hollands, managing director of Tilney Group, thinks that investors’ hang-ups about the sector are a result of the constant diet of “doom and gloom stories about Brexit” and the government’s current “fragile” state, which has effectively tarred all UK equities with the same brush.
However he admits “an annus horriblis for the massive Woodford Equity Income fund may be an additional factor at the margin”.
Investors may well be fearful of the “neo-Marxist Labour Party waiting in the wings whose programme if implemented would be very bad for Sterling and the UK balance sheet,” and the Office of Budget Responsibility’s downgraded forecasts, but Hollands points out that “the UK still leads the way for dividend yields”.
Out of fashion
Ryan Hughes, head of fund selection at AJ Bell investments, agrees there is an “anti-UK effect” in place that is prompting people to look further afield for income.
But he also thinks that today’s investors are pre-occupied with growth stocks, nowhere more obvious than the obsession with the sexy stocks coming out of Silicon Valley, which has pushed more people into global equities and multi-asset funds and away from old fashioned strategies like equity income.
The shift in strategy preference could explain why flows across UK equity income funds have been negative for 18 consecutive months. Traditionally, the equity income sector has favoured high-yielding stocks, which tend to be the giants of the FTSE 100 index, your British American Tobacco’s, Shell’s, etc.
This explanation also gels with the figures from Morningstar, which shows large-cap blend funds suffering larger outflows (£1.4bn in total year-to-date) than mid-cap (£74.6m) and small-cap funds (£575m).
The bigger they come
However, Morningstar senior analyst Peter Brunt believes the true culprits behind the sector’s recent negative net flows are the small handful of big funds that have had a difficult time performance-wise – namely the CF Woodford Equity Income Fund and Mark Barnett’s Invesco Perpetual income strategies.
Over September and October, Woodford’s flagship fund saw £604m worth of redemptions, according to Morningstar, not including the outflows recorded by wrapper versions of the fund offered via the Old Mutual Wealth platform, which accounted for another £60m.
Meanwhile Barnett’s Income, High Income and Strategic Income funds, together comprising some £16.5bn, saw outflows of £67m, £235m and £11m over the two months, respectively.
Unlike the IA, Morningstar classifies Barnett’s trio of vehicles under the UK equity income sector, which explains why its outflow data is higher than the IA’s monthly stats. Looking at the UK investment management trade body’s figures, the UK equity income category only recorded negative net retail sales of -£9m in September and has racked up outflows around £963m.
“You could argue that Mark Barnett’s funds have seen similarly large outflows, but not quite to the same extent,” says Brunt. “The IA UK All Companies sector has benefited from what looks like a significant asset allocation shifts through index trackers during those two months, somewhat countering Barnett’s outflows.”
After ignoring the outflows from Woodford’s and Barnett’s funds, the discrepancy between UK equity income and UK equity negative flows doesn’t seem quite so large. Rather than being the most unloved asset class of the last few months, it seems UK equity income is just as unloved and avoided as UK equity in general.