Gradual exodus from UK equity income as retail outflows rise

But in recent months UK equity income has fallen out of favour with domestic retail investors, with the IA UK Equity Income sector recording net retail outflows of £174m in February 2017, the second worst selling sector in the month. 

Global equity income, however, seemed to find more traction, with net retail inflows in the month of £54m. 

Andrew Kinsey-Quick, consultant at Natixis Global Asset Management’s portfolio research and consulting group, explains: “We have witnessed a gradual exodus from the UK Equity Income sector. The peak in flows occurred between late 2013 through early 2016. Since then there appears to be consistent outflows.

“The choice of stocks in which to invest for equity income funds is limited by design, and with investors chasing the same high-dividend stocks, intra-stock correlations have increased.”

Adam Avigdori, co-manager of the BlackRock UK Income fund, points out income shares are offering an attractive yield relative to many other sources of income in the current environment. “The sterling devaluation has provided a currency tailwind that is benefiting many FTSE companies, and we are starting to see this come through in a number of special dividends being announced across the market,” he says. 

“What is important for us is not the absolute level of dividend, but instead the prospects of dividend growth.”

Given the uncertainty on Mr Trump’s ability to press ahead with his fiscal plans, bond proxies could once again be an attractive option Nick Samouilhan, Aviva Investors

Meanwhile in the US, Clare Hart, portfolio manager of the JPM US Equity Income fund, suggests the support from the US economy to justify rising shares “looks fairly good”, with expectations for 2-2.5 per cent GDP growth in the country in 2017. 

“With inflation running around 2-2.5 per cent, that’s more like nominal growth of 4 per cent or higher. There’s no reason to think the slow and steady recovery is set for a reversal at this stage, but the single most important factor is the US consumer,” she says. 

“Consumers make up more than 70 per cent of the health of the US economy and so far they are holding up. For companies to do well we need a bit of a ‘goldilocks’ balance, where the economy grows but rapid wage growth doesn’t erode profit margins,” she adds. 

Nick Samouilhan, multi-asset manager at Aviva Investors, says: “Stocks that pay consistent dividends on the back of transparent and predictable income streams, such as utilities, real estate investment trusts, consumer staples and telecoms, have delivered strong returns in an environment of ultra-low interest rates. These bond proxies performed well up until 10-year US Treasuries dipped to lows in the middle of 2016. The subsequent rise in Treasury yields prompted some convergence between the two sectors.”

But he adds: “Donald Trump’s victory in the US presidential election sparked a sharp divergence again, with growth stocks moving higher and bond proxies selling off in the expectation his policies would boost growth and inflation. 

“But given the uncertainty on Mr Trump’s ability to press ahead with his fiscal plans, bond proxies could once again be an attractive option.”

Nyree Stewart is features editor at Investment Adviser