Avoiding the UK income trap

Only two actively-managed funds authorised in Hong Kong and Singapore have outpaced the FTSE All Share index over the past three years, and both explicitly target stocks for capital appreciation.

The Merian UK Alpha Hedged Fund has achieved a 35.58% cumulative returns with core holdings in commodity groups BP, Rio Tinto and Royal Dutch Shell, financials HSBC and Lloyds Banking and pharmaceutical giant Glaxo Smith Kline.

The Schroder ISF UK Equity Hedged Fund has a similar sector profile and has earned a 27.43% return during the same period, compared with a 23.29% return by the FTSE All Share index.

Yet, it has been a turbulent three years in the UK since the Brexit referendum in June 2016, and the country’s political woes and the difficulties for British businesses is set to continue. Meanwhile, GDP growth peaked at 3.1% in 2014 after recovering from the 2009 recession and has since been on downward trend, falling below the G7 average in 2017, according to the OECD.

However, investors who have taken a cautious view and sought extra income yield to compensate for low banks savings rates have suffered.

The worst performing fund is  Neil Woodford’s SJP UK High Income fund, which is down 8.72% over the past three years and, as was widely reported earlier this year, has experienced an exodus of disappointed investors. The fund’s value has also fluctuated, with annualised volatility of 15.2% compared with 12.76% for the index.

The Threadneedle UK Monthly Income is the second worst under-achiever, posting a 2.46% return over three years  – and reinforcing the lesson that it made sense to aim for capital growth rather than income to make up your total return.

Key performance metrics for top and bottom UK funds

Source: FE Analytics. In US dollars. 27 Feb 2016 to 22 Feb 2019

Top and bottom performing funds vs FTSE All Share Index

Source: FE Analytics. Three-year cumulative performance in US dollars.