|
| Personal finance articles |
|
|
|
Failing to keep their promise
By Fiona Hamilton
The big attraction of UK Equity Income funds is that they should yield at least 10% more than the All Share index, and their yield should rise over time. Bond funds offer a higher immediate income, but their payouts do not have the same potential to grow, nor do they have the same potential for long-term capital growth.
On this basis, UK Equity Income funds should be a relatively sensible place to sit out the current turmoil in the stockmarket. As diversified portfolios of companies, they should ensure the holder does not miss out when the market gets back onto a sustained upswing, while protecting them against shock setbacks in individual holdings. In the meantime, investors are rewarded for the wait with respectable dividends.
The snag is that a lot of UK Equity Income funds have been paying out less than promised. As evidence, the average yield on the sector is barely over 4%, whereas the minimum ought to be over 4.2%.
The main reason why so many of these funds have been reneging on their dividend commitments is that stockmarkets have been exceptionally unfriendly to income-seekers over the last couple of years. Mining, which has been much the strongest sector, is very low yielding, whereas banks, pharmaceutical and oils, which are among the bigger income producers, have been weak if not disastrous.
Funds have therefore found themselves faced with a choice of honouring their income commitments or securing a better total return.
To illustrate the point, Neil Woodford's Invesco Perpetual High Income and Invesco Perpetual Income funds have chosen performance over yield. They are among the lowest yielding in the sector, but have been consistently among the top performers. In contrast, Tinneke Frikke's Newton Higher Income fund is much more committed to its yield discipline, but has seen its performance slip well down the sector.
Superior total refunds
Woodford has little invested in banks, whereas a fifth of his fund is in utilities and a fifth in tobacco and other consumer goods. He has been one of the most consistently successful UK fund managers over the last six years, and his supporters seem happy to sacrifice income for superior total returns, as the two funds have grown fast. There are fears their massive combined size could be inhibiting, but Woodford says it is not a problem.
Frikke had 20% in financials as recently as August, when she cut back in favour of more oil and gas. She has been using market setbacks to pick up shares in companies which appear to have been unfairly marked down - including cruise ship company, Carnival (CCL) - but she is not overtly optimistic about prospects.
"We believe that clarity about the severity of the global slowdown will need to be forthcoming before any upward trend in markets can begin," she says.
Neptune Income combines a just below average yield with well above average performance figures. Lead manager, Robin Geffen, did well to shift the emphasis from medium to larger companies fairly early in 2007, and made good gains on takeover targets such as Rio Tinto (RIO) and Scottish & Newcastle. Geffen says he is less interested in companies with the highest available yield than in those with the ability to grow their dividends by around 7% to 8% a year. He remains very wary of property, construction, banks, and insurance companies.
"Banks are not attractive to buy. There will be dividend cuts of between 40% and 50% in the sector," he warns. Artemis Income has an average yield, and a good three and five year record. Manager Adrian Frost has not avoided banks altogether but has managed to pick the stronger ones, such as HSBC (HSBA) and Lloyds TSB(LLOY). He is wary about the outlook, but excited by the number of shares that have slipped back to tempting yields.
"It all looks very risky, but that's what it's about. Things are on a high yield because everyone hates them," he says, pointing out that it is the income manager's job to decide which de-ratings are justified.
Frost suggests the recent shortage of takeover activity has been unhelpful for income funds, as takeovers help to transform languishing companies. He is hoping that the big falls in shares prices will prompt more companies into mopping up their weaker brethren. "When companies look friendless in the public market, it is reassuring to know the cavalry may be round the corner," he comments.
Useful links:
|
Send Article by Email
Send Article by IM
Blog This with Y! 360
Printable View