1st November 2013
With confidence on the rise and the economy slowly getting back on track, Britons are ploughing millions into investment funds and portfolios which invest in dividend paying shares are the flavour of the month.
According to the fund management trade body, the Investment Management Association, in September, small investors put more than £2bn into investment funds, representing a rise of 17% from the same time last year and a massive 93% increase since September 2008.
As a result Brits now have a combined £739bn invested in funds and during the month, ever popular UK Equity Income funds were the top pick, notching up sales of £358m, the highest since April 2007.
Of course the attraction of equity income funds, is based on more than just stockmarket confidence. Given that interest rates have been at an all-time low for more than four years, savers have seen rates on bank and building society savings accounts slashed to the bare minimum – and with the current rate of inflation stagnating at 2.7%, finding an account to match, let alone beat the cost of living is a near impossible task.
In the last 12 months, savers have witnessed the average interest paid on no-notice accounts fall by 0.38% according to Moneyfacts while the FTSE 100 index on the UK’s top firms, has soared by 15% over the same period, given the differential it is easy to see why embattled savers are turning to the stock-market.
Equity income funds aim to deliver attractive income and also capital growth, by investing in the shares of dividend-paying firms i.e. groups which share their profits with their investors. And to further boost their appeal, the average fund is yielding around 3.71% and has returned 78% to investors over the last five years.
The share prices of regular dividend-paying firms tend to be less volatile than those of other companies; for example, Royal Dutch Shell and Vodafone are among the UK’s bigger dividend payers and next year it is expected that British firms will share more than £100bn with investors.
One of the UK Equity Income sector’s stars, Neil Woodford, the manager of Invesco Perpetual Income fund, who is set to leave Invesco in 2014 to start his own fund group has delivered a hugely impressive return for investors. Over the 25 years he has been managing the fund he has delivered a total return of more than 2,220%. But the sector still houses a number of talented managers – we list the expert’s top recommendations.
Top Equity Income Picks
Adrian Lowcock, senior investment manager at Hargreaves Lansdown rates Artemis Income, up a considerable 108% over five years. Lowcock says: “The managers Adrian Frost and Adrian Gosden continues to look for companies with healthy cash flows where the long-term potential for dividend growth is strong.”
Another pick for Lowcock is Rathbone Income, up 113% over the period. He says: “At the fund’s core are a number of stable, high-quality businesses which could provide resilience throughout a market cycle. This has been combined with a more economically-sensitive element of the portfolio, including higher risk smaller and medium-sized companies. We favour this approach as well as manager Carl Stick’s focus on growing both income and capital over the long term.”
Rob Morgan, pension and investments analyst at Charles Stanley Direct backs the Threadneedle UK Equity Income Alpha fund up 68% over five years. He says: “The fund is managed by Leigh Harrison and Richard Colwell, experienced managers skilled in striking a balance between investing in high yielding sectors while including more growth-orientated ideas. This fund is often overlooked compared to more illustrious rivals, despite quietly achieving some impressive returns. It has remained a relatively small size, something which we believe could give it an edge, as it has the flexibility to invest more heavily in small and medium-sized companies where the managers can often find some interesting ideas. It also has a relatively concentrated portfolio meaning that each investment has a more meaningful impact on returns – though this can also increase risk.”
Morgan also likes the Trojan Income portfolio, 89% better over five years. Managed by Francis Brooke, his aims are simple; grow both capital and income over the long term whilst controlling volatility says Morgan. He adds: “The type of company Mr Brooke invests in also lends the fund resilient qualities. He favours easy-to-understand businesses with high barriers to entry, producing consistent increases in sales and profits. This tends to rule out more economically-sensitive areas such as banks. It also means the fund has lagged behind most of its peers so far this year, and Mr Brooke continues to worry that market valuations are looking stretched.”