Equity income has suffered in 2008 from high exposure to bank shares and an underexposure to stronger performing mining stocks.
The Investment Management Association’s UK equ- ity income sector under-performed UK all companies by 3.4 per cent in the first half of 2008 but has since reversed the position to outperform by 2.9 per cent for the year to November 17.
Senior analyst Elliot Farley says this revival is set to continue. He says: “We believe income will form a vital component of returns until the bear retreats. We are already seeing signs that the number of equity income funds beating the FTSE All Share index is rising.”
He says the traditional exposure of equity income funds to large-cap stocks with strong balance sheets will bolster performance.
Farley says: “Many of these generate significant amounts of their earnings from outside the UK which is also good from a currency perspective. Markets are key to returns but currency is increasingly becoming an issue for investors as sterling heads in the same direction as the UK economy.
“With an earnings and large-cap focus, many equity income funds will find themselves better positioned for the threat to sterling than other UK funds.”