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The IMA UK Equity Income sector has proved time and time again to be a popular choice among investors in the UK, frequently topping the rankings for new inflows. These types of funds, which in their best form offer not only steady income, but also some degree of capital appreciation, have found their perfect audience in the baby-boomer generation, who have previously flocked to them with school fees in mind, and now see their appeal afresh for retirement planning.

The nature of these funds gives them a certain structure, with a tendency to migrate up the cap scale to the natural home of dividend payouts in the large and mega-cap arena. Managers within the equity income space have also tended to prefer certain sectors such as utilities and telecoms because of their continued support of shareholder value. Overall, they tend to favour large, established companies with more measured growth and a good dividend stream.

However, while equity income funds tend to have certain key characteristics in common, there are, of course, big differences, not least in terms of performance. While the IMA definition for the sector states funds have to aim to achieve a yield on the underlying portfolio in excess of 110 per cent of the FTSE All-Share yield, it is fair to say not all funds achieve this. The funds also differ wildly in terms of the overall returns offered.

While this sector has undoubtedly been popular, thanks in no small part to the sustained outperformance of many of its IMA peers, it is unclear whether this can continue. With the equity bull run beginning to slow and yields being driven down, what is certain is managers in this sector face much tougher times ahead.

Invesco Perpetual High Income

The sheer size of the £8.6bn Invesco Perpetual High Income fund is testament to the success and popularity of manager Neil Woodford. He has an enviable track record since he joined the profession in 1987 as a manager at Eagle Star, before moving to Invesco Perpetual in 1988. He is now head of investments for the firm.

This fund is the largest in the UK retail space, but Mr Woodford also runs the £6.7bn Income fund, giving him substantial influence over the sectors in which he invests. With a high stake in areas such as tobacco, utilities and telecoms, he has more power than most to affect the day-to-day management of his portfolio holdings.

Mr Woodford has a long-standing love of defensive, non-cyclical stocks and is particularly famed for his high weighting in tobacco stocks. Indeed, the fund has its top-two holdings in tobacco stocks, with 5.6 per cent in Reynolds American and 5.4 per cent in British American Tobacco. A further 4.4 per cent is invested in Imperial Tobacco.

For such a large fund, it is relatively concentrated, with only 81 holdings and 44 per cent held in the top-10 stocks. This has assured that when a stock performs well it has the necessary traction to make a material difference to overall performance.

Performance has certainly been convincing, with an historic yield of 3.4 per cent, as well as convincing returns. Over three years to 18 February, the fund has returned 47.8 per cent, compared with a sector average of 20.8 per cent. Over one year and three months, the fund has suffered a loss, in line with equities in general, but has still outperformed the peer group and its index with a loss of 6.1 per cent and 7.5 per cent, respectively, compared with a loss of 13.4 per cent and 8.6 per cent for the sector.

Neptune Income

The £544.7m Neptune Income fund was launched in December 2002 by chief investment officer and founder of Neptune, Robin Geffen. It has been managed by him since launch, although Alex Breese became assistant manager in September 2006, after just over a year with the company. He continues his role as an engineering analyst for Neptune, in keeping with the company's management structure.

Neptune as a whole is well known for the extent to which it has embraced the emerging markets - particularly Russia and China - across its range of funds. The Income fund is no different, although it sits in the UK Equity Income sector, which necessitates that it hold the bulk of the fund in UK-listed stocks.

It has significant international exposure, with 8.3 per cent in Europe excluding UK, 5 per cent in emerging markets and 2.6 per cent in Asia Pacific excluding Japan. There is also 7 per cent held in cash, with the remaining 76.9 per cent invested in the UK.

The fund previously stood alongside the £11.3m Global Income fund, managed by Felix Wintle, which had the stated aim of tapping into the growing culture of better shareholder value in overseas markets before a decision was taken to combine it with the £597.9m Global Equity fund at the end of last year. This may explain the higher-than-average exposure to markets outside of the UK, as some of the best ideas migrated to the UK Equity Income product.

Certainly, performance has been strong, with an historical yield of approximately 3.68 per cent. The fund has returned 32.1 per cent over three years, compared with the peer group average of 20.8 per cent. Over one year, it is one of the many funds in the sector to suffer a loss, with a drop of 6.5 per cent. However, the sector as a whole fell by 13.4 per cent, meaning the fund remained seventh out of a universe of 82 funds.

New Star Higher Income

New Star Asset Management has three funds in the UK Equity Income space, all of which have experienced varying degrees of success over the past three years. The £70.4m UK Strategic Income unit trust, for example, has returned 22.9 per cent over three years, and is ranked 24th out of 74 funds. However, over one year, the picture is not so bright, with the fund falling to 72nd in the sector, with a loss of 18.9 per cent, compared with 13.4 per cent for the sector.

Meanwhile, the £3.6bn Higher Income fund, although undoubtedly popular, has bobbed around in the third and fourth quartiles over recent years, with a return of just 3.7 per cent over three years, compared with 20.8 per cent for the sector. Further, the fund lost 23 per cent over one year, compared with 13.4 per cent. However, investors in the fund have enjoyed income yields of around 5.16 per cent.

Manager Toby Thompson, who previously managed the £2.9bn Newton Higher Income fund, took over the fund in 2002. He takes a contrarian approach to stock picking, and has 26.27 per cent in banks and 10.68 per cent in life insurance.

The fund is also characterised by its large stock positions, with 8.21 per cent in the Vodafone Group, its largest holding, and 6.43 per cent and 6.42 per cent in Royal Dutch Shell and HSBC Holdings respectively.

The fund is susceptible to the volatility of the markets as a whole, and has suffered as a result of its exposure to banking. However, as it employs a contrarian strategy, it is best to view it over a longer time period, when it will be less affected by short-term market turbulence.

Laura Mossman is features editor at Investment Adviser