Equity Income Funds
Sue58
Posts: 288 Forumite
It seems that Equity Income Funds (both UK & Global) are popular with investors and especially those who invest for income only. I think I understand that in general they offer a higher dividend/yield which is attractive to income seekers and they are potentially less volatile because they invest in successful companies that will pay good dividends?
However, if you didn't want to take an income and was investing only for growth are Equity Income Funds in the accumulative version still a viable option? Especially if you already hold a Global Fund and a UK All Companies Fund? As an example, would it be advantageous to hold CF Lindsell Train UK Equity and CF Woodford Equity Income in the UK sector and also Fundsmith and Artemis Global Income in the global sector or should you really stick to one fund in each sector?
I'm a little bit confused on this (but trying to learn) so would appreciate any views that will enlighten me. Thanks.
However, if you didn't want to take an income and was investing only for growth are Equity Income Funds in the accumulative version still a viable option? Especially if you already hold a Global Fund and a UK All Companies Fund? As an example, would it be advantageous to hold CF Lindsell Train UK Equity and CF Woodford Equity Income in the UK sector and also Fundsmith and Artemis Global Income in the global sector or should you really stick to one fund in each sector?
I'm a little bit confused on this (but trying to learn) so would appreciate any views that will enlighten me. Thanks.
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Comments
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Generally income funds will offer a version that pays out the income (inc) and one that accumulates the income within the price of the investment (acc).
EDIT: I use income (acc) funds as part of my 'growth' portfolio, and would consider switching to the inc version when / if I want to take the actual income.Personal Responsibility - Sad but True
Sometimes.... I am like a dog with a bone0 -
Dividend reinvestment is a powerful driver of strong returns in the longer term. The effect is called compounding.
Capital growth can provide (very) strong returns in the short term or at any time, it can also drive (significant) losses at any time. One way to mitigate that aspect is to diversify investments across various regions and a range of asset classes.
Regular dividend reinvestment acts as a counter weight to both positive and negative capital growth, in as much as it raises or lowers very slightly the average cost of a holding depending on whether the valuation is in positive or negative territory. Over a longer period that effect becomes more pronounced.
As always it will depend what you're wanting to achieve and how you plan to execute. I've chosen to use dividend income as part of a rolling rebalance schedule by simply adding it to new money being invested as allocation balance dictates.'We don't need to be smarter than the rest; we need to be more disciplined than the rest.' - WB0 -
Shares that generate income tend to have specific characteristics that make it useful to consider them as different to the average. In particular:
- they make a profit
- they are secure in their market and generate cash
- the share values are less volatile than the average
So they can be regarded as a different type of asset to those shares that dont generate an income. It could therefore make sense to hold an income fund and a higher risk growth fund in the same geography - there wont be many companies that could sensibly appear in both funds. Having them as separate funds rather than in one general fund means that you could change the balance of your portfolio over time and arent dependent on the balance chosen by the fund manager who may not be chasing the same objectives as you.
One caveat though - these sort of considerations only really make sense for larger portfolios. For small portfolios with a simple objective of long term growth the effect in absolute terms would be small.0 -
Shares that generate income tend to have specific characteristics that make it useful to consider them as different to the average. In particular:
- they make a profit
- they are secure in their market and generate cash
- the share values are less volatile than the average
So they can be regarded as a different type of asset to those shares that dont generate an income. It could therefore make sense to hold an income fund and a higher risk growth fund in the same geography - there wont be many companies that could sensibly appear in both funds. Having them as separate funds rather than in one general fund means that you could change the balance of your portfolio over time and arent dependent on the balance chosen by the fund manager who may not be chasing the same objectives as you.
One caveat though - these sort of considerations only really make sense for larger portfolios. For small portfolios with a simple objective of long term growth the effect in absolute terms would be small.
Thanks Linton for explaining this to me in more detail.
One further query/question. CF Lindsell Train UK Equity and Fundsmith seem to fit the bill to your criteria below (except perhaps the volatility part) and they are not in the Equity Income sector? Or am I wrong on this point?
- they make a profit
- they are secure in their market and generate cash
- (the share values are less volatile than the average)? Not sure about this point.0 -
Thanks Linton for explaining this to me in more detail.
One further query/question. CF Lindsell Train UK Equity and Fundsmith seem to fit the bill to your criteria below (except perhaps the volatility part) and they are not in the Equity Income sector? Or am I wrong on this point?
- they make a profit
- they are secure in their market and generate cash
- (the share values are less volatile than the average)? Not sure about this point.
Those characteristics refer to the companies the funds invest in, not the funds themselves. Lindsell Train focuses on a relatively small number of good mainly UK companies that it believes will increase in value through growth and doesnt pay a higher dividend, which is why it sits in the UK All Shares sector. Fundsmith operates in a similar way but mainly buys US shares, so it cant be in a UK sector. Because it invests in the US it wont pay much income - US tax rules make income less desirable than capital growth.0 -
So in conclusion it could make sense to hold a global income fund like Artemis Global Income along with a growth fund lke Fundsmith? The same theory would apply to the UK sector with CF Woodford Equity Income and CF Lindsell Train as the growth fund?0
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Hi SueSo in conclusion it could make sense to hold a global income fund like Artemis Global Income along with a growth fund lke Fundsmith? The same theory would apply to the UK sector with CF Woodford Equity Income and CF Lindsell Train as the growth fund?
I'm sure Linton might explain it far more succinctly than myself but....
It can make perfect sense to hold income (acc) funds as part of your overall growth portfolio. The simple reason is that the funds in question are likely to focus on different sectors / companies, i.e. one looking for good income, one focussed on outright growth potential.
The only way to satisfy yourself that the funds are reasonable for your purposes / portfolio is to investigate the individual fund objectives and actual holdings.Personal Responsibility - Sad but True
Sometimes.... I am like a dog with a bone0 -
There is nothing wrong with mixing fund types within a portfolio as long as overall it gets you the exposure to different types of returns that you are looking at.So in conclusion it could make sense to hold a global income fund like Artemis Global Income along with a growth fund lke Fundsmith? The same theory would apply to the UK sector with CF Woodford Equity Income and CF Lindsell Train as the growth fund?
The Artemis and Woodford funds you mention are focused on delivering a high level of income so will be at one end of the 'income versus growth' scale. Personally I wouldn't put the other two funds right at the other end of that scale. Really they are just a mix of growth and income with the overall prospects of the portfolio company being the important driver of whether it's bought or not.
Smith's top ten holdings includes Philip Morris (massive US tobacco company paying about 3.5% dividend), Pepsi (paying almost 3%), Microsoft (paying over 2% which is high for a technology firm).
He refers to his ethos as 'high quality, resilient, global growth companies' but he is not buying the ones that are pure growth focussed with zero dividends like Facebook and Tesla and Amazon, he's looking at the ones he thinks will grow while also being able to weather the storms with that 'resilience' characteristic - thus the high proportion of holdings (over 30%) in the 'consumer staples' category like Philip Morris's tobacco or Pepsico, and more things in other categories that are not quite consumer staples but pretty ubiqitous like Microsoft selling operating systems and productivity software to most homes and businesses around the world and generating large amounts of cash payable to investors as dividends.
All his businesses must have growth potential and sustainably high returns, so he won't hold 'pure income' investments, but he focusses on a particular type of company that meets his specific criteria rather than all-out growth.
Lindsell's published objective starts "to deliver capital and income growth and...", so it's not a pure growth fund either, it pays a couple of percent of dividend yield.
What Fundsmith and LT have in common is that they have quite concentrated portfolios following their own convictions with relatively fewer holdings than the average fund in their sector and low levels of turnover or 'churn'. The concentrated portfolio can lead to higher levels of volatility over time than others with broader holdings. If you have decided to put some stable high-income-paying fund in one hand, you could perhaps be more willing to put a fund such as this in the other.
At the end of the day of course, all four funds mentioned are 100% invested in equities (company shares) so if we have a massive market crash they will all sink temporarily and the type of crash and recovery we have might affect some funds more than others.0 -
make sense to hold a global income fund like Artemis Global Income along with a growth fund lke Fundsmith?
At the risk of stating the bleeding obvious, if you're aiming to achieve growth then it would make sense to invest in a diverse range of vehicles that specifically aim to achieve the same goal.
Conversely, if your aim is to generate income it would make sense to invest in a diverse range of vehicles that specifically aim to achieve the same thing.
The only reason I can see to hold both themes together is if you're aiming for a blend, in which case there are also vehicles that specifically aim to do just that, I'm doing this myself to an extent, albeit in different portfolios.
However when doing both it is almost certain that any one will stifle the full potential of the other, compared to simply going all in with either theme.
Whether that matters, or proves to be the better option long term, with regard to your portfolio's eventual total return is anyone's guess.'We don't need to be smarter than the rest; we need to be more disciplined than the rest.' - WB0 -
At the risk of stating the bleeding obvious, if you're aiming to achieve growth then it would make sense to invest in a diverse range of vehicles that specifically aim to achieve the same goal.
Conversely, if your aim is to generate income it would make sense to invest in a diverse range of vehicles that specifically aim to achieve the same thing.
The only reason I can see to hold both themes together is if you're aiming for a blend, in which case there are also vehicles that specifically aim to do just that, I'm doing this myself to an extent, albeit in different portfolios.
However when doing both it is almost certain that any one will stifle the full potential of the other, compared to simply going all in with either theme.
Whether that matters, or proves to be the better option long term, with regard to your portfolio's eventual total return is anyone's guess.
It doesn't seem bleeding obvious to me. Why would income funds have acc units if there wasn't a demand to use these funds to achieve growth?0
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