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UK equity income funds suffer £18.4bn of net outflows


Investors have pulled more than £18bn from UK equity income funds since the beginning of 2016, with the popular product now under greater scrutiny due to the Neil Woodford scandal.

Equity income funds, which provide investors with the proceeds of dividend distributions, have long been popular with retail and institutional shareholders.

“Typically equity income is seen as a steady one to invest in,” said Samuel Meakin, a research analyst at data provider Morningstar, who added that they focus on “large, sturdy, dependable dividend paying companies”. The funds often invest in sectors such as energy, pharma and consumer goods, industries perceived as reliable in returning profits to shareholders.

However the strategy has suffered huge outflows in recent years with concerns over Brexit underpinning poor returns.

UK equity income funds suffered net outflows in all but three months between January 2016 and May 2019 with investors pulling £18.4bn, according to data from Morningstar. Assets held in the category have shrunk from a peak of £92.8bn in May 2017 to £67.9bn at the end of last month.

The products invest the majority of their portfolio in UK-listed companies, many of which earn revenues around the world. However the funds are typically more exposed to companies that derive more of their revenue from the British economy, according to Morningstar.

Such companies have underperformed their more internationally-focused peers since 2016 “reflect[ing] the market’s dislike of uncertainty and, arguably, its attempt to price in the impact of a disorderly no-deal Brexit,” Morningstar said.

The funds have performed poorly in comparison with UK benchmarks. They delivered a net return of 20.2 per cent between 2016 and the end of April this year compared with 34.3 per cent on the FTSE 100 Total Return Index in the same period.

Investors have voted with their feet. Funds which have suffered the biggest outflows between the start of 2016 and the end of April this year are Invesco High Income, which has lost £4bn, and Neil Woodford’s eponymous Equity Income fund which has lost more than £3bn.

Invesco High Income lost a net 8.66 per cent in the year to the end of May.

Another Invesco income fund has incurred outflows of £2.6bn.

The Invesco funds are both managed by Mark Barnett, who inherited Mr Woodford’s funds when he left the group to set up his own company in 2014. The three funds have a particularly high exposure to UK revenues.

“Over the past year we have found increased risk-adjusted investment opportunity among UK domestic facing companies, and our exposure to selective UK domestic orientated companies supports a particularly attractive outlook for investor returns,” Mr Barnett said in a statement, adding that the funds had “seen a natural steady redemption profile for a number of years” and are “not experiencing any unusual increase in redemptions”.

Mr Woodford, one of the country’s best known fund managers, took the rare step of gating his flagship Equity Income fund at the beginning of the month after being swamped by redemptions.

He has long struggled to keep the portfolio below a regulator-imposed ceiling of 10 per cent in hard-to-sell unquoted assets and the fund has heavily underperformed.

The decision triggered a crisis that has prompted questions from MPs and led to criticism of Hargreaves Lansdown, the fund supermarket that promoted Mr Woodford. The Financial Conduct Authority — which has also come under fire from lawmakers over its supervision of the fund — has launched a formal investigation.



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