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What Happened to the UK Equity Income Fund? Once a mainstay of most investors’ Isa and retirement portfolios due to its attractive offer of income and return on capital, the UK Equity Income Fund is currently about as unpopular as a fox on a farm. of chickens.
Look at the facts. The UK equity income investing sector has seen 14 straight months of exits as investors seek better value elsewhere.
In total, investors withdrew nearly £ 5 billion from these funds during this period – £ 18 billion since 2016. But by leaving, they missed a bull run.
The UK equity income sector generated an average return of 27% over the 14 month period
Laura Suter, head of personal finance at wealth management platform AJ Bell, points out that the UK equity income sector generated an average return of 27% over the 14-month period.
This compares to the 18% gain recorded by the FTSE 100 – the index comprising the largest companies listed on the London Stock Exchange.
Jason Hollands, managing director of wealth management platform Tilney, describes the liquidation of equity income funds as “quite shocking”, adding that the funds were “historically the cornerstone” of private portfolios.
He adds: “I don’t think investors should give up on UK income funds – far from it,” he says, noting that in the long run most of the gains in UK stocks tend to be due to dividends.
Ian Lance, co-manager of the Temple Bar income-focused investment trust, says investors who sold the sector might regret it. “Many might come to regret their decision to leave the equity income business at exactly the wrong time,” he warns.
Whether you think it’s time to get back into the equity income business depends on your take on the health of UK Plc and its ability to restore a healthy stream of dividends.
Still, many experts believe investors could benefit from a UK equity income fund or two at the current price.
The rise and fall of equity income
UK equity income funds appear to offer the holy grail in today’s low interest rate environment – steady income from equities that are expected to rise in value over time. So what went wrong to trigger huge investor outflows?
Dzmitry Lipski, of investment platform Interactive Investor, suggests part of the recent sale is due to the ‘dividend drought’ in the UK, where companies have cut payments to shareholders due to Covid -19.
“It was really a pandemic theme,†he says.
But there were other issues at play as well. The notorious failure of Neil Woodford’s giant equity income fund, which has yet to be liquidated, has dramatically reduced confidence in the industry.
Then there was the uncertainty of Brexit, which depressed UK stocks, and a trend toward ‘growth’ stocks during the pandemic – as tech company valuations took off at the expense of duller pillars that poured out dividends.
Many experts believe that the industry’s unfavorable reputation is unfair and funds undervalued.
“One would expect greater investor demand for this sector which offers investors an annual income of around 3.6%,” said Annabel Brodie-Smith, director of communications for the trade organization Association of Investment Companies.
Darius McDermott, managing director of fund expert Chelsea Financial, also admits he doesn’t quite understand the exodus of equity income funds.
“I don’t know why investors seem to be avoiding this sector,†he says. “This could be because the UK stock market is so unloved right now – and people may be diversifying more these days into global or regional equity income funds.”
He adds: “It’s always an obvious investment choice for me. The UK is the most mature dividend market in the world and has one of the highest dividend levels even after the pandemic. As fund scrutineers, we still believe in the sector.
Why dividends should now rebound
The UK dividend drought now appears to be over. Simon Gergel, who heads the Merchants Income Investment Trust, says income from the investment universe has been “hit hard in 2020, with larger and larger dividend cuts than we’ve seen in n ‘any crisis before’.
But he says the worst is over. “This success is accompanied by an equally strong recovery, with dividends in 2021 not expected to be too far from their 2019 peak across the market.” The UK stock market now offers investors an income equivalent to three percent.
Job Curtis, who runs the City of London investment firm, says it’s “much more than bank deposit rates or government bond yields at their lowest.”
Curtis is now bullish on the outlook for UK dividend-paying stocks, believing the stock market will continue to rebound as takeovers from private equity and overseas firms indicate there is value to be had .
A wide variety of backgrounds … and performances
Once you’ve decided on the investing virtues of a UK Equity Income Fund, there is a bewildering array of funds to choose from – over 80.
The range of performance in the sector is wide.
The best performing over three years, a multi-cap income fund from Gresham House, returned 38.6% and 3.4%, while at the bottom of the table funds such as UBS Equity Income posted losses.
Lipski of Interactive recommends Royal London UK Equity Income, which will be led by current deputy Richard Marwood when senior fund manager Martin Cholwill retires later this year.
The fund’s main sector holdings are in industrials, financials and consumer discretionary. It earns more than three percent and has generated three-year returns in excess of 14 percent.
He also recommends Diverse Income Trust, which can invest in UK businesses of any size, but favors medium and small businesses.
The trust is currently earning 3.1% and its stock price has risen 30.4% over the past three years.
McDermott of Chelsea recommends Threadneedle UK Equity Income and Jupiter Income.
He says the Threadneedle fund, managed by Richard Colwell, has a “pragmatic approach targeting both capital growth and income, rather than prioritizing the latter like some income funds.”
It has made 12.7 percent profits over the past three years. The fund currently holds significant positions in AstraZeneca (7.8%); Electrical components (6.8%); Rentokil (5.1%); and GlaxoSmithKline (5 percent).
He also invested 5% in supermarket company Morrisons, which is currently in a bidding war.
Jupiter Income is down 2% over three years, but over the past year it has delivered a 30% return.
Ryan Hughes of the AJ Bell fund platform loves Temple Bar Investment Trust. Its major holdings include Royal Mail, ITV and Anglo American.
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