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Income revival

At the time, I thought it was a great little news story. “IFA darling Invesco Perpetual sales slump” was the gist of it back in late 1999 as the technology boom embraced just about every investor alive.

I had not long been covering the investment patch on this paper and did not fully understand the reason why advisers were shunning Invesco’s star man, Neil Woodford.

The reason of course, was that his style of investing was out of favour. Equity income funds were being ignored because they did not invest in technology-related stocks which were booming.

If I had been a little more perceptive, maybe I should have realised that equity income funds were not far from being the place to be, given that thoughts of the technology sector overheating were starting to be raised towards the end of 1999.

Fast-forward to 2008 and Neil Woodford and his equity income peers are suffering a performance drag they have not experienced for years.

The popular Principle Income Study has just placed white list regulars Anthony Nutt (Jupiter income) and Carl Stick (Rathbone income) in the grey list because they have both suffered from high-yielding value stocks.

There are reports that money is flowing out of the equity income sector – a trend that would have been unthinkable in recent years. These funds have rarely let investors down, delivering positive returns in 15 of the 20 years until 2006, and are also blessed with experienced fund managers that have seen stockmarket woes before.

You wonder whether investors are acting in haste. Equity income managers are, in essence, value managers and that style of investing has had a dreadful time as its growth counterpart, all commodities and emerging markets, has led the way.

Equity income managers are understandably optimistic. It has not been lost on Nick Purvis at Schroders that “All the ingredients that fed the equity income sector after the tech bubble are in place.” He tells me that the mistake that people are making is looking to the short term, which he admits is still dark for equity income. But he adds: “The markets are as dislocated as they were back then and that created the environment for income funds to do well.”

Chris White, a manager on the Threadneedle income team, reckons that the select band of truly sustainable growth stocks will become ever more select as the economy reaches its nadir and supposed growth stocks that fail to deliver (because they are actually cyclicals) will get severely punished by the market. This, he suggests, will see income funds resume their long-term outperfor- mance of growth.

It is only natural to expect equity income fund managers to talk up their chances of delivering in the future. But according to Style Research, which analyses over 300 UK funds, managers of all types have slowly started to make a slight tilt back towards value stocks.

However, many advisers have yet to make the shift. On the other hand, multi-managers that are often ahead of the game are keeping a beady eye on the sector.

They still have a growth bias towards their portfolios but they are aware that equity income funds will have their day in the sun again.

They believe that a fall in the oil price could be significant and it has dropped from its highs in recent weeks.

They know that an opportunity is on the horizon to cash in on the equity income slump.

For pointers, Bill Mott at Psigma is one fund that is limbering up on their bench. Another is Henderson equity income, which is one of the less well known funds that is starting to generate interest.

But perhaps many investors have learned their lessons from 1999. After all, Woodford’s income fund continues to be among the top sellers. It would be foolish to write him off but equally it would be foolish to dismiss the equity income sector per se.

A few months ago, the great stalwarts of the sector – Bill Mott, Tony Nutt, Anthony Frost and George Luckraft and Woodford – were trailing the FTSE by some margin – but over the summer they have closed the gap. You would do well to keep an eye on them.

Paul Farrow is digital personal finance editor at the Telegraph Media GroupMoney Marketing

50 Poland Street, London W1F 7AX


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