14th January 2015
Investment in retail funds fell to £1.3 billion in November, down from £2 billion in October, new figures reveal.
The data, from the Investment Association (which has recently re-branded from the Investment Management Association), showed that UK equity income was the best-selling sector for the sixth consecutive month with net retail sales of £466 million.
Property was the best-selling asset class with net retail sales of £366 million. Equity was the second best-selling asset class with net retail sales of £350 million, well down from £982 million in October. Mixed Asset was the third best-selling asset class in November with net retail sales of £286 million.
Tracker funds net retail sales remained strong at £488 million.
Laith Khalaf, senior analyst, Hargreaves Lansdown, said: “Fund sales appear to have weakened towards the end of last year, with both European and Japanese funds seeing outflows. Equity income funds and property are the main sectors which held up best, in fact property fund sales were up around a third on the previous month.
“This tells us that income-producing assets still remain flavour of the month with UK investors, little wonder given the measly rates they are getting on cash held in the bank.
“Property funds do come with a health warning attached though- funds can be illiquid, and costs are so high they significantly eat into returns. Investors in these funds need to make sure they are going in with their eyes wide open, so there aren’t any nasty surprises further down the line.”
Jason Hollands, of Tilney Bestinvest, said that it is not surprising equity income has proved so popular while interest rates remain at record lows and bond yields are unremarkable.
He said: “The average UK Equity Income fund has beaten the FTSE All Share Index for each of the last five years on the trot (and the best have done considerably better). Indeed, over the long run much of the real return from the UK stock market has come from dividends, especially when reinvested, so a UK Equity Income fund can make a good, long-term core holding within a portfolio.”
However, he warned that on a nearer term view the outlook for many of these funds is less certain.
“Most UK Equity Income funds are heavily skewed to the FTSE 100 where the largest distributors of dividends are to be found – indeed in the last fiscal year, around 57% of total UK dividend pot came from just 15 companies, such is the concentration of dividends.
“Yet dividend growth has been slowing and the FTSE 100 has significant exposure to oil and gas where prices have been on the slide as the commodity rout has played out. The woes of the supermarkets, who are facing stiff competition from discounters, are another potential threat to dividends,” he warned.
Hollands said this does not mean long-term investors should avoid UK equity income funds in this year’s Isa, but just that they should make sure that their portfolios are not overloaded with this type of investment already.
“It might instead be a shrewd move to try something different and more complementary, for example by selecting a fund that allocates a greater amount to mid-sized or smaller companies, rather than the usual blue chips names.”
Hollands said that two funds worth considering are the Standard Life UK Equity Income Unconstrained fund (or the sister Standard Life Equity Income Investment Trust) both of which are managed by rising star Thomas Moore.
These portfolios invest right across the UK market rather than anchor to the usual blue chip dividend stocks. “The open-ended fund currently has around 45% in mid-caps and 15% in smaller companies, which tend to be more exposed to the UK economy – still a relative bright spot compared to many other parts of the globe. Notably just 1.1% of the fund is invested in oil and gas. The fund is yielding 4.1%,” he said.
Another fund that Hollands said “could dovetail existing large-cap focused UK Equity Income funds, together providing a more diversified income strategy, is the smaller company focused Unicorn UK Income fund”. He pointed to its yield of 5.1%. “Its top ten holdings include the likes of brewer Marston’s and movie theatre chain Cineworld, stocks you won’t find in your bog standard UK Equity Income fund.”
“Better still, if you do need income, go where central banks are likely to keep (or start) pumping stimulus; that’s the Eurzone and Japan, but it might make sense to choose funds that hedge the currency risk.”