What next for equity income?

"Some of the more growthy areas of the market did very well not just because the expectation was that interest rates would stay low forever. But we are at the start of a new era, and when people realise that, they will be more attracted to defensive shares.”

Despite his view being that interest rates and bond yields will be higher, he has not been tempted to take significant positions in the commodities sector, which often benefits from that climate.

Since the end of the financial crisis, dividends were a lot lower, and that’s why a targeted approach is needed.Ian Brady, WH Ireland

He says: “In order to deliver a positive return for clients, we try to invest in companies that have long-term income prospects. So, for example, there might be a commodity company out there that pays out a fixed percentage of its profits every year. 

"That might look predictable, but if the profits vary hugely from year to year, as they often do with commodity prices, then the yield is not sustainable.”

At present, he says he is finding better value outside the large cap parts of the market now, but within the FTSE 100 his preference is for companies in areas such as utilities. 

Murphy says that while utilities are a traditionally defensive sector of the equity market, “many of the companies there are trading quite cheaply because the market has feared the impact of windfall taxes. And while there are windfall taxes, the impact of those taxes on those companies has not been penal.”

In terms of portfolio construction, Brady says he prefers to buy single country funds rather than global equity mandates. 

“I think the value we add for a client is in terms of doing the asset allocation ourselves. It is part of our process to be targeted in our exposure," says Brady.

"But in terms of the future outlook, I think dividends contributed far too much of the returns from dividends between 2000-10, but since the end of the financial crisis, dividends were a lot lower, and that’s why a targeted approach is needed.”

Because those types of equities can grow dividends, they behave more like inflation-linked bonds, and so can offer protection.James Harries, Troy

Ciaran Mallon, UK equity fund manager at Invesco, says for clients who have defensive income as a priority, then “diversification across sectors and geographical regions is the key”.

James Harries, equity fund manager at Troy, says many of the defensive stocks that underperformed for large segments of this year did so because the market views those types of shares as “behaving like bonds”, but he feels this misreads the investment case.