Net retail sales in the Invest ment Management Association’s UK equity income sector were impressive in 2006, hitting 2bn between January and November. This compared with 1.5bn for the whole of 2005 and 1.8bn in 2004. A number of firms have responded to increased demand with new and revamped products.
UBS Global Asset Management, Sarasin Chiswell and JP Morgan Asset Management all unveil equity income portfolios this month. UBS UK equity income is set to launch at the end of March and will be run by Brian Gallagher, who joined from Gartmore last week. The fund will hold 50 to 60 stocks and may use derivatives under Ucits III rules to smooth the income stream.
The Sarasin fund, also called UK equity income, holds a more concentrated portfolio of 25 equally weighted stocks. It has been run by Graham Ashby since January 10, with an initial target yield of 4 per cent net, together with income growth. Meanwhile, JP Morgan’s global equity income fund will have an estimated gross yield of 4 per cent when it launches on February 7. The portfolio will be able to invest in stocks in any sector, with no geographical constraints.
It is not difficult to see why the sector is gaining popularity among investors. Returns for equity income funds have been strong over the short and long term.
According to data from Financial Express, the UK equity income sector returned more than the UK all companies sector over the one, three, five and 10-year periods ending January 16. The most pronounced difference was over the longest timeframe, where UK equity income outperformed by nearly 30 per cent.
Investor appetite for the funds is reflected in the Adviser Fund Indices. UK equity income is the most popular sector in the Cautious index overall, followed by UK corporate bond. Exposure to the sector also increased during the November AFI rebalancing and the Balanced and Cautious allocations grew by 1.6 and 1.3 percentage points respectively.
UK equity income exposure in the AFI comes from a range of funds. The most popular are Artemis and Jupiter income, both selected 13 times across the three indices.
Neil Woodford’s 4.4bn Invesco Perpetual income fund takes third spot with 10 selections. Woodford increased his exposure to undervalued mega-cap stocks at the end of last year. He also expects a cyclical correction in the global and domestic economies, leading him to avoid premium valuations in cyclical shares.
Tony Nutt, manager of the 3.5bn Jupiter portfolio, has increased his weightings to companies which are capable of producing strong dividend growth in a slowing economic environment.
He points to tougher times ahead for value investors, with a convergence in the returns of growth and value stocks over the last two years.