EquitiesMar 26 2012

A broader outlook for equity income

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ByNyree Stewart

In a low interest rate environment investors have focused more on deriving an income from a variety of equities so much so that from January 2012 the IMA established a new global equity income sector to sit alongside the original UK equity income peer group.

In terms of longer-term performance there is little to choose from between the two sectors. The average of the 15 global funds with a three year track record returned an impressive 66.53 per cent, compared with the 68.87 per cent average of the 91 funds in the UK equity income sector.

However, when compared to the MSCI All-Country (AC) World and FTSE 100 equity markets, the two sectors underperformed, with the MSCI returning 78.21 per cent for the three years to March 2 2011 and the FTSE 100 returning 87.47 per cent.

In part this is due to the volatile macroeconomic conditions since 2009 in the aftermath of the Lehmans collapse, and recent ongoing uncertainty regarding the sovereign debt crisis in Europe and resulting austerity measures, in addition to concerns over slowing global growth.

However in what was one of the most volatile years for investments, equity income sectors performed well in 2011, with global funds returning an average 4.46 per cent, slightly ahead of the IMA UK Equity Income sector’s 3.94 per cent.

In addition, in the past year these income strategies outperformed the main indices, with the MSCI AC World returning a small 0.85 per cent for the year to March 2 2011, while the FTSE 100 returned 2.04 per cent.

That said, the average figures do disguise a variety of individual returns, with the one year performance in the IMA Global Equity Income sector ranging from the 2.5 per cent loss of the £11.75m River & Mercantile Global Higher Income fund to the 10.61 per cent positive return of the £1.88bn Veritas Global Equity income, according to Morningstar.

The IMA UK Equity Income sector also has its fair share of divergence in performance. The worst-performing fund for the year to March 2, the £23.82m Marlborough UK Income and Growth trust, recorded a loss of 5.66 per cent compared with the 12.67 per cent return of the £462.2m Troy Trojan Income.

Reversal in attitudes

The reasons for this disparity in recent performance can in some part be attributed to a reversal in investment attitudes at the turn of 2012 from a strong aversion to risk in first part of the second half of 2011 to appetite for risk returning in the subsequent months.