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Undervalued UK equities offer hedge against falling dividends
Markets
by Luke Smithy on Apr 22, 2011 at 00:01
Despite a difficult period after the credit crunch – with dividends from the banking sector and an oil spill-focused BP being sharply cut – UK equity income funds have remained among the industry’s most popular.
Falling dividend payouts across many sectors in 2009 created a challenging background for fund managers, but with negligible returns on bank deposits and bond inflows pushing yields down, investors have continued to look to equities for income.
Figures from Capita Registrars now show a much improved backdrop, with three quarters of sectors growing their distribution in 2010.
UK income funds are also in a single peer group again after an ill-fated attempt to split the sector into high and low yielders fell foul of the first market-wide dividends decline in several decades.
Looking at the top performers, Invesco Perpetual’s Neil Woodford is conspicuous by his absence.
The veteran manager took a defensive stance as the market rallied throughout 2009 and most of the past year, which has weighed on his three-year numbers. Despite this, he remains convinced his scepticism on inflated cyclical valuations will prove correct.
Another notable absentee is Tony Nutt (pictured). His Jupiter Income fund continues to struggle, having been hit particularly hard last year by his considerable stake in BP.
Unicorn’s UK Income fund is currently the sector’s best over one, three and five years to the end of January. The team uses the kind of low turnover, fundamental approach exemplified by Woodford. Senior manager John McClure says this strategy typically means a focused portfolio and his skew has been towards export-driven companies that operate in international markets.
‘While the UK’s prospects remain uncertain, we took the view very few investors were recognising the global scope of many British companies,’ adds McClure.
‘Many of our companies manufacture high value specialist products and are benefiting from the surge in demand from countries such as India and China.
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