By GRAHAM FROST 28/12/2011
UK Equity Income & Defensive UK Equity
We believe the prospect of a lower growth backdrop should suit equity income investing, with dividend returns likely to account for a larger proportion of total returns.
Following their experience of the 2008/9 recession, companies have already taken steps to strengthen their balance sheets. As a result, many now boast net cash positions and dividend payments are comfortably covered. Consequently, even if the UK were to experience a double dip recession, we believe dividends are more sustainable at current levels.
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Dividend yield prospects for 2012
The historical yield for the FTSE All share is currently about 3.9% before tax; equity income funds typically provide a yield of at least 110% of this figure. Current market forecasts for dividend growth in 2012 are 9%; whilst this figure could fall as investors trim their profit expectations, we still believe there is room for positive dividend growth going into the new year. Investors are reminded that historical or projected yields are not reliable indicators of future returns.
This chart refers to past performance which is not a reliable indicator of future results.
Equity income sector exposure
The equity income sector generally provides investors with a higher exposure to non cyclical sectors such as healthcare, consumer goods, telecommunications and
integrated oil companies. These companies tend to be more defensive and less volatile by nature, compared to the more cyclical areas of the market such as mining, banks and industrials. In the event that we experience a period of weakness in equity markets we would expect these funds to hold up relatively well.
Global companies
The UK stock market offers investors access to a large number of global high quality businesses – approximately 2/3rds of FTSE companies’ revenues originate from overseas. The fortunes of these companies are not tied to the UK economy and can provide investors with exposure to higher growth economies such as the US and emerging markets.
Other defensive UK equity options
Alternatively, we believe investors could focus on UK fund managers which have historically demonstrated a more conservative, defensive investment style epitomised by companies with strong balance sheets and established market positions, where they can bring their pricing power to bear.
In many respects these companies have similar attributes to those found in equity income funds, although in this instance the manager is not bound by dividend yield criteria (JO Hambro UK Opportunities) enabling him to invest across a broader universe.
Top fund ideas
We have provided our house view on this sector, but would remind you that the value of all investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change.