Some of the UK shares that have fallen farthest as a result of the pandemic are where the best opportunities lie for UK equity income funds in 2021, according to a range of portfolio managers.
Ian Lance, who runs the £100m RWC Enhanced Income fund, said some of the shares that have fallen were now "unbelievably cheap" and "worth buying".
He said: “I think we are now at the stage where the market is quite similar to 2009, just after the financial crisis, when investors had a choice between buying the stocks that had fallen a lot in value and so offer notionally high yields, or buy the stocks with lower, but more predictable dividends, but trading at higher valuations.
"I think we are now at the point where the valuations of the out of favour stocks are as it was in 2009, so it is worth buying some of those now.
"Its worth noting for example that the banks didn’t pay a dividend because the regulators forbade it, not because they couldn’t pay, and the share prices fell sharply, and now the mood music around those dividends has changed, and I think it's quite likely they will be able to pay next time.”
Dan Hanbury, who runs the River and Mercantile UK Equity Income fund, agreed there was less value among the more predictable dividend paying companies.
He has less than the market average weighting in companies such as Unilever and Diageo.
Mr Hanbury, said while there was a lot of bad news around UK equity income, the negatives were mostly already reflected in the valuations, with the UK market having sharply underperformed relative to the rest of the world this year.
Ilan Chaitowitz, who runs the Nomura High Conviction fund, said the globally the value type stocks, many of which tend to have higher dividends, have under performed relative to growth stocks this year by about 30 per cent, as a result of pandemic fears, but that despite the economic outlook improving markedly as a result of vaccine discovery, those stocks haven’t risen sharply in value, and so represent an investment opportunity.
Job Curtis, who runs the £1.5bn City of London investment trust, which has increased its dividend for each of the past 54 years, said: “It has been a traumatic year for dividends, with about half of the FTSE 100 cutting or cancelling payouts, but in the last few months the outlook has improved, with some of the traditional big dividend payers such as the property companies British Land and Land Securities, having re-started dividends.
"I also like the house builders, the recent financial results they have been producing have been strong, and the insurers. The thing with the insurance companies is that after Brexit, the capital requirements may change, allowing them to hold fewer bonds and more income assets, which would be good for dividends."
One area of the market on which Mr Hanbury is cautious is the big oil companies.
He said: “Some companies will almost certainly pay structurally lower dividends in future. While the oversold and under-owned oil majors shares are bouncing following earlier significant dividend cuts and price underperformance, their track record suggests it is going to be a challenging task to transition to lower GHG (greenhouse gas) emissions whilst avoiding further asset write-downs and sub-par returns.
"On a long-term view, how they allocate capital is a real challenge and so it is hard to make a case for building significant positions despite their near term gearing to a recovery from the pandemic.”
Chris Ralph, chief investment officer at St James's Place, said the big oil companies had been paying unsustainably high dividends for many years, and the pandemic provided an excuse for those companies to re-set their payouts at permanently lower levels.
david.thorpe@ft.com
