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Popularity for UK Equity Income funds continues

Figures released by the Investment Association this week have revealed that during November, UK Equity Income funds continued to be the best-selling investment fund sector with retail investors for the sixth month on the trot with net inflows of £466 million.

Jason Hollands Jason Hollands
15 January 2015

This is perhaps unsurprising given that interest rates continue to languish at record low levels, bond yields aren’t anything to speak about and the average UK Equity Income fund has beaten the FTSE All Share Index for each of the last five years on the trot (and the best have done considerably better). Indeed, over the long run much of the real return from the UK stock market has come from dividends, especially when reinvested, so a UK Equity Income fund can make a good, long-term core holding within a portfolio.

That said, on a nearer-term view, the outlook for dividends is less certain. Most UK Equity Income funds are heavily skewed to the FTSE 100 where the largest distributors of dividends are to be found – indeed in the last fiscal year, around 57% of the total UK dividend pot came from just 15 companies, such is the concentration of dividends in the UK. Yet dividend growth has been slowing and the FTSE 100 has significant exposure to oil and gas where prices have been on the slide as the commodity rout has played out. The woes of the supermarkets, who are facing stiff competition from discounters such as Aldi and Lidl, are another potential threat to dividends.

Does this mean long-term investors should avoid UK Equity Income funds for this year’s ISA? Certainly not. However, if your portfolio is already loaded up with these funds, why layer up the same underlying stock bets? It might instead be a shrewd move to try something different and more complementary, for example by selecting a fund that allocates a greater amount to mid-sized or smaller companies, rather than the ‘usual’ blue chips names.

Two funds worth considering are the
Standard Life UK Equity Income Unconstrained fund managed by rising star Thomas Moore, and Unicorn UK Income. Standard Life UK Equity Income invests right across the UK market and has around 45% in mid-caps and 15% in smaller companies. These tend to be more exposed to the UK economy – still a relative bright spot compared to many other parts of the globe. Notably just 1.1% of the fund is invested in oil and gas.

Another fund that could dovetail existing large-cap focused UK Equity Income funds, together providing a more diversified income strategy, is the smaller-company focused Unicorn UK Income fund. Its top ten holdings include the likes of brewer Marston’s and movie theatre chain Cineworld, stocks you won’t find in your bog standard UK Equity Income fund.

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