The trials of the UK equity income sector

There’s also a school of thought that regular dividends indicate higher quality in a company – a facet that should provide additional defensive backbone in a sell-off.

But, as crisis struck in 2008, UK equity income funds were caught in bed with the banks, as their shares were paying high dividends, looked cheap on some measures and made up a large part of the UK index.

In addition, these funds have a history of lagging a rising market for the opposite reasons to those set out above. Unfortunately, they remained true to form in the post-crisis rebound. This also contributed to the underperformance of the average fund in this sector.

However, as is often the case, the conventional sector average distorts the case in favour of the index and the tracker. Because while the average investor has underperformed, they have done so by less than the average manager, and with lower risk too (if you accept volatility as a valid measure of risk). It’s also worth noting that there are signs of a return to form for funds and, particularly, fundholders in this sector, with the latter making a modestly positive return of 2.2 per cent in the 2012 compared with the market’s loss of 3.1 per cent.

The final point to make is that, for this sector, this performance comparison may not be entirely fair. Equity income funds are different from funds in most other equity sectors in that they are charged with generating an income for their investors, something which may put them at odds with the total or relative return objectives of more generalist funds.

This requirement may preclude them from holding certain low-yielding parts of the market that are doing well (again, think back to tech stocks in the nineties), or even restrict them from using cash as a defensive asset, as doing so would reduce their income-earning ability.

Funds and fundholders in this sector, for example, both look better compared with a high-yield index, which may be a more appropriate gauge for their style of investing (which begs the question why most still use the wider UK equity index as a yardstick).

It almost goes without saying that the decisions of Invesco Perpetual’s Neil Woodford have a huge influence on the total wealth of UK Equity Income holders. At nearly 40 per cent of the sector, he burns especially brightly in this particular fund universe.

And then there’s John McClure’s Unicorn Income, a small-cap specialist fund that has left its benchmark trailing in its wake. But impressive as this is, it hasn’t helped UK Equity Income fund holders one bit, as 99.99 per cent of them didn’t hold it over the five years in question.

Simon Evan-Cook is senior investment manager at Premier Multi-Asset funds