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Income and value funds to the fore

After further ripples in the tech sector following the demise of boo.com,

investors are desperately hoping that June will finally see a settling in

the market.

Although May witnessed the inevitable US interest rate hike, many believe

several further rises are due on both sides of the Atlantic before we see

anything approach-ing stability.

But, while the press continues to focus on the highs and lows of

technology, media and telecoms, very little has been said about the income

and value funds, which have been making a strong recovery.

Perpetual, scorned for its complete avoidance of the tech sector, has seen

its income funds become some of the strongest short-term performers.

Over one year, investors in Perpetual&#39s AAA-rated income fund would be

showing a negative return of £913 on an initial investment of £1,000.

However, the same amount inv- ested only three months ago would now return

£1,209.

Hargreaves Lansdown head of research Mark Dampier says: “Income funds are

seemingly boring but they are coming back quite strongly now.

“There has been some very violent sector rotation recently and it is very

hard to get it right. It can whiplash you rom one sector to another and

private investors usually try to hit it at the wrong time and have

inevitably lost a lot of money.

“Technically, rising interest rates are not a help to value but it depends

on how high you think they are going to go. We are not talking about some

kind of double-digit calamity – even in the US. Once we see signs that the

economy is starting to slow down, then we will have the green light to buy

into the tech sector again.

“I see the cycle as having three stages. First, you have the sex, where

the market races up, then you get the violence and bloodbath, where the

stocks all come tumbling and finally you have the mourning period, where

people are more cautious. I am not convinced we have seen the end of the

bloodbath with tech stocks yet but the period of mourning is definitely

starting.

“Ideally, you should go for a balanced approach over the whole year

covering both tech and value sectors to try and minimise exposure to this

cycle.”

George Luckraft, fund manager of ABN Amro&#39s equity income fund, believes

in the two-tier approach. Operating a barbell approach to his fund, he is

the only manager in the UK equity income sector to have kept on top of the

tech fallout. An investment of £1,000 in his fund a year ago would now

return £1,452, 30 per cent more than its nearest rival.

Luckraft says: “Part-way through last year, quite a lot of income stocks

were under pressure because of the shape of the global economy, so I split

my fund into two parts – a high- yield part and several growth stocks. I

used the returns from the growth stocks to buy more yield stocks and I have

seen very strong results.”

Although income- and value-based funds have seen a recent run of

popularity, the draw of technology is still too great for some investors.

Although the tech sector has been more of a bear market in the past few

months, many are less than convinced that the sensible income and value

sectors are a substitute for the rock and roll of TMT.

Torquil Clark head ofe-commerce Mike Attree says: “The star performers

still look like the tech funds. If you got in 12 months ago, you could

still be 50 per cent up now. It is only those who started getting into tech

around February time who will be really heavily hit.

“This kind of shake-out in an emerging industry is quite common. There

will always be a period of consolidation after the frenzy. Although I think

tech stocks will rise again, I do not think we will see the market leap

forward like it has done again, so income and value funds may well stay in

favour for a little longer.

“I think what we will see now is a blurring of what is a tech stock and

what is not. Every company is becoming a web stock to a certain extent

because all businesses are having to get involved with the internet, so

technology is destined to play a big part in fut-ure markets.

“The market is tipped to take off in the next year will be Europe,

especially with the euro being so low at the moment. The big thing there

will be telecommunications, where Europe still has a big advantage compared

with the US.”

Consultant PricewaterhouseCooper predicts that80 per cent of UK tech

stocks will run out of cash in thenext 15 months. With pessimistic

predictions like these, tech sector volatility is likely to prevail over

the summer months and provide a period of strong performance for the income

and value sectors.

However, the underlying feeling from many IFAs seems to be that income and

value will only stay in favour until the cycle begins again in the autumn.

Whether it is technology or telecoms that become the next bandwagon, the

markets seem to have slipped into a cycle which sees uncertainty through

the summer and bullish behaviour through the winter.

Dampier says: “If I could only invest my money on one day of each year, I thinkI would pick around November 1. That seems to be when the sex begins again.”

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