A tough as old boots

  • Story by: Laura Mossman
  • Magazine: InvestmentAdviser
  • Published Monday , March 17, 2008

The golden era may be over for funds in the UK Equity Income sector, but they are by no means out of the game just yet

Advertising

Funds within the IMA UK Equity Income sector have long been popular with investors, consistently attracting huge inflows ensuring the sector has remained at the top of the IMA's most-wanted list. They have proved to be a good option for those looking to benefit from regular dividend payouts, ensuring a steady income to meet demands such as school fees or retirement planning.

However, 2007 proved to be a tough year for these funds. According to Morningstar, the sector lost an average of 8.5 per cent over the past year to 3 March, overshadowing the 4.1 per cent hit the IMA UK All Companies sector took over the same period. Moreover, less than half of the funds in the sector met their yield target of 110 per cent of the FTSE All-Share index's yield.

That is not to say there were not some bright stars shining through the gloom. Indeed, a significant percentage of funds have been enjoying good returns as well as impressive yields. What is more, there is a general sense of optimism among managers, with growing confidence they can make the most of general market volatility to unearth good opportunities. Indeed, over the start of 2008 they have benefited from an overall move towards large caps - their natural hunting ground - in a flight to quality.

Another rich environment for equity income investors is Europe, which has taken a slice of new inflows as the wider array of good value stocks becomes apparent. Whereas in the UK yields have been driven down - a victim of their own success - on the continent there is estimated to be over three times the amount of suitable stocks available, which makes for more varied and profitable portfolios.

In addition, some companies in the emerging markets are now looking more closely at adding shareholder value, opening up the possibility of great growth potential as well as strong yields all within one fund. This is certainly an area of the market that looks set to grow as global equity income funds establish a longer track record and prove themselves to sceptics.

While UK Equity Income might not be in as strong a position as it has been in recent years, particularly in the golden age between 2005-06, it is not dead in the water. It may be going through tough times, but it has a loyal fan base and can still prove itself to be a good sector for the long term.