george luckraft's abn amro equity income fund tops the sector with credit suisse's bill mott and inv perp's neil woodford not far behind
The big name star fund managers in the UK equity income sector feature predominantly in Standard & Poor's look at discrete annual returns over the three years to the end of March 2002.
Funds run by George Luckraft, Bill Mott, Neil Woodford and Carl Stick are among those with highest returns and alphas over the three year period. Luckraft's ABN Amro Equity Income fund posted the highest return over three years, returning 80.68% compared to the sector average return of 8.66%. He outperformed the worst fund in the sector over this time frame, Exeter High Income, by 126.01%.
Luckraft, who uses a barbell investment approach, also has the highest annualised alpha in the sector, at 20.67%, and has one of the lowest betas, at 0.85%. This compares to the sector average annualised alpha of 0.58% and beta of 1.01%.
Luckraft said that he generated most of this alpha in the first two years of this period as, over the past year, performance has been down, falling 1.71% for the 12 months to the end of March 2002.
He said performance suffered over this time period due to his continued investment in a number of growth stocks, which have suffered in what is currently a very value orientated market. Luckraft was one of the pioneers of the barbell approach to managing equity income, combining a select holding of growth with more traditional income stocks. As the growth stocks in this structure perform, he trims the holdings, using the profits to buy more income stocks.
At present Luckraft said about 10% of the fund is in pure growth stocks and about 90% is invested in traditional income holdings.
He said he is currently underweight FTSE 100 stocks and overweight small caps. This, he said, means there is less volatility in the fund as small caps at the moment are less volatile than FTSE 100 stocks.
As regards to looking for signs of a return to growth, Luckraft said: 'With the sell off in Vodafone, with shares now being under a £1, it could be a signal of a selling climax and while times may yet still be choppy, there are signs of hope for a return in growth investing.'
Over three years to the end of March 2002, more than half of the funds in the UK equity income sector recorded positive returns.
Bill Mott, manager of Credit Suisse Income and Monthly Income, has achieved impressive returns over each discrete period over the three years, however these have been achieved at the expense of greater volatility, with both of his funds, Income and Monthly Income, having an beta of 1.16%.
Over one year to the end of March 2002, Credit Suisse Income returned 19.68%, while over three years it has grown by 50.72%. Its alpha, like Luckraft's is also well above the average, at 12.87%.
Martin Cholwill, manager of Axa UK Equity Income, runs a fully 100% equity invested fund, rather than investing in any fixed interest securities or convertibles.
Cholwill said he uses the FTSE 350 High Yield Index as a benchmark because he will not get the desired yield by investing in the FTSE All-Share using his strategy. As such the beta on the fund is slightly higher than the sector average at 1.16%, he said.
He said that historically the 350 High Yield Index has outperformed the All-Share, outperforming it on a total return basis since 1986.
Over the last five years Axa UK Equity Income has outperformed the sector by 3.4%pa to 31 March 2002, according to Cholwill. Over one year the fund has returned 8.56% and over three years it is up 18.73%. It also produced positive returns for the discrete periods of April 2000 through to March 2001 and April 1999 to March 2000.
He said: 'Performance has been consistent because I try to invest in companies with growing dividends that are supported by growing and sustainable free cash-flow. I try to identify out of favour quality companies when they are on a yield premium. I do not look at profits as they can be misleading, you have to look beyond the headline numbers.'
Neil Woodford, manager of the Invesco Perpetual High Income and Income funds, has also achieved decent one and three year returns, but at a slightly lower alpha than some of the other star names in this area of the market.
Over three years, Woodford has produced returns of 33.31% and 35.63% on High Income and Income respectively, with alphas of 8.3% and 8.94%.
Compared to these high returns, a 45.33% fall in returns over three years from Exeter High Income, managed by Chris Giles, would appear somewhat disappointing.
However, Giles said that this fund is very different from all the other funds in the equity income sector in that it exists to provide double-figure yields, rather than the 3% average yield for the sector.
This high income comes by way of investing into split capital investment trust income shares, which as has been well documented, have had a very difficult last year.
As such over one year the fund has returned -40.8%, compared to the average sector return over the same time period of 1.69%.
Giles said: 'While performance has been disappointing, relative to the performance of the indices of which we invest, ie the average income share performance and average income and residual share performance, the fund has done better than expected.'
Over one year the average income share has produced a return of -55% and the average income and residual share has fallen -65.4%, he said.
Giles added the fund would be about 15% better off if the price quoted was the offer price, not the bid price which Exeter has decided to use.
He said: 'The underlying performance of the fund is not as bad as the raw data suggests.'
The portfolio has about 75 stocks, 56% of it is in traditional income shares rather than geared ordinary shares, which themselves account for 30% of the portfolio. The rest is invested in preference shares and 1% is in cash.
Giles said: 'By being invested mainly in stocks which are invested in equities rather than other splits, if we see a sustained rise in the UK equity market over the medium term, the fund will start to deliver returns.
'In a number of the stocks we invest in you are getting a geared play on the equity market. For example City of Oxford Geared Income is currently worth 58p, it will rise to 100p in four years provided equity markets rise no more than 4.5%pa.'
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