View more on these topics

Get rich slow

Although growth stocks have been in the limelight in recent years, with higher-yielding shares appearing to be the understudies of the investment world, it is the latter which have stolen the show. Why is this so?

Growth stocks, with their “sexy” image have so far raised investors&#39 expectations of superior returns whereas, in reality, we are now in an era of moderately low equity returns. As a result, some of those growth stocks have now lost their sparkle and are looking lacklustre.

Even though we are seeing the onset of a global synchronised cyclical economic recovery, investors must adjust their expectations to face up to lower total returns from equity investments.

Of those total returns,a significant proportion will come from dividends, making equity income funds more attractive than growth funds, in which returns come from capital growth.

Investors are placing greater emphasis on risk. After the technology boom and bust, they have begun to assign more value to security and are moving their focus away from higher returns to safer returns. The spotlight is falling on companies with sustainable yields, those companies with good profits, best positioned to perform over the longer term.

In fact, equity income funds offer a double benefit – income payments and the potential for capital growth. Even better, recent performance figures show that equity income funds are significantly outperforming their growth.

This phenomenon is highlighted by the performance of the FTSE 350 Higher Yield index (the higher-yielding half of the stockmarket, excluding smaller companies) – the best proxy for equity income shares. The index has risen by 2 per cent compared with a decline of 9.6 per cent for the FTSE All-Share index in total return terms for the one-year period ending May 31, 2002.

Indeed, since its inauguration in 1986, the FTSE 350 Higher Yield index has consistently outperformed the stockmarket as a whole, with the exception of the technology bubble at the end of 1999. This relative performance is illustrated in the graph above.

Clearly, the FTSE 350 Higher Yield index has outperformed relative to the FTSE All Share, above all since the bursting of the technology bubble. Even though past performance is not a guarantee of future performance, we believe income stocks will continue to outperform the UK equity broader market, although not by the margins seen over the last couple of years.

These figures, together with the nature of the economic recovery, may well see the further rise of dividend-paying stocks in the UK vis-à-vis growth stocks and, as a corollary, a pick-up in demand for UK equity income funds versus growth funds.

In this environment, investors should look for a fund that offers consistent outperformance, run by an experienced manager backed by a strong team of equity analysts.


Pickering recommends scrapping spouse benefits and index-linking

Pickering’s report into pensions legislation is recommending the removal of spouse benefits and index linking in a bid to stop employers closing defined benefit schemes. It says the Government should remove the requirement for occupational pensions and the protected rights element of private pensions to rise in line with the retail price index. This would […]

Sandler recommendations could damage customers

Ron Sandler&#39s recommendations run the danger of being achieved at the expense of consumer protection says the Financial Services Consumer Panel.It says removing the obligation to provide “suitable advice” and “know their customer” could potentially lead to future misselling scandals. The Panel points out that misselling in the past of personal pensions, mortgage endowments and […]

FSA set for probe into unfair contract terms

The FSA is to start a consultation into unfair contract terms later this summer which could force life offices to review their existing books and allow policyholders to escape unfav-ourable contracts.The consultation, which could leave a large dent in life office coffers, is thought to cover the swathes of policyholders stuck in closed funds or […]

Vive les tax differences

Last week, I started to describe some of the main differences between offshore roll-up funds and offshore bonds, in the context of proposals in the Government&#39s consultation document on offshore funds.As I pointed out, anyone advising clients where an offshore investment may be appropriate has to make decisions regarding the suitability of any particular investment […]

Sierra Leone cover image - thumbnail

White paper — Sierra Leone International Insights

Jelf Employee Benefits assesses the areas that employers should be aware of when considering operating in Sierra Leone, including healthcare access, delivery and insurance provisions. This report draws on various sources to highlight specific considerations for this emerging jewel in West Africa.


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers. Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and thought leadership.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm