Equity income investors urged to choose hitters not quitters
Funds of funds specialist T. Bailey has tipped the bear-beating equity income market to drive returns in 2009 – but has warned ISA season investors to steer clear of funds that are “income in name only”.
T. Bailey is confident the strong performance that saw the IMA UK Equity Income Sector average outperform the FTSE All-Share Index by 4% during the second half of 2008 is set to continue.
But CEO and Fund Manager Jason Britton cautioned investors to choose wisely in the wake of the controversial creation of a new sector for funds that have historically underperformed.
In order to be included in the IMA UK Equity Income Sector a fund is required to achieve an historic yield of at least 110% of the yield of the UK equity market as measured by the FTSE All-Share Index.
T. Bailey’s own research shows that fewer than three in five equity income funds reached the target as at 31 December 2008.
The IMA recently introduced a new UK Equity Income and Growth Sector for those funds that fail – allowing them to return a yield of as little as 90% of the FTSE All-Share Index, while still claiming to have an income mandate.
Britton said: “There’s a very clear choice for equity income investors at the moment – hitters or quitters.
“Some funds have hit the target and will continue will to do so. Others have quit for a sector that can offer income in name only. The serial failure to hit the target has been going on for too long, and the offenders shouldn’t have been given a get-out in the form of a new sector that masks underachievement. There is already a sector for UK funds that do not meet the yield target; it’s called the IMA UK All Companies sector.”
He added: “The benefit of a fund of funds in the equity income sector is that we are always monitoring the yield of underlying funds to maintain income. We believe 2009 should provide an excellent opportunity to invest in equity income, and the ISA season is obviously a perfect time to take advantage of that.”
The T. Bailey Equity Income Fund, which is one of only a handful of funds of funds in the IMA UK Equity Income Sector, has regularly exceeded the IMA target, typically averaging around 120% of the FTSE All-Share Index yield.
As at 31 December 2008 the T. Bailey Equity Income Fund declared a distribution of 139% of the yield of the FTSE All-Share Index – an historic yield of 6.22% against the Index’s 4.49%.
T. Bailey research highlights how the IMA UK Equity Income Sector has outperformed the IMA UK All Companies Sector in 15 of the past 25 years to 31 December 2008.
With dividend income reinvested and excluding the impact of initial charges, an investment of £10,000 in the average of the IMA UK Equity Income Sector funds would have risen to £127,073. It would still have risen handsomely if invested in the average performance of the IMA UK All Companies Sector – but only to £110,344.
T. Bailey is so confident in equity income funds’ potential that it has started introducing them across its entire fund range.
Assistant Fund Manager Elliot Farley said: “Our performance shows that equity income, if managed properly, can form a vital component of returns during a bear market.
“That’s because the traditional exposure of equity income funds to large-cap stocks with strong balance sheets helps bolster performance.
“Many of these stocks also generate significant amounts of their earnings outside the UK, which is also supportive of earnings from a currency perspective.”
Websites are all very well, but sometimes only a very knowledgeable human will do. Please leave your details, and we’ll call you back.
Request call backThe value of your investment and the income derived from it can go down as well as up, and you may not get back the money you invested. When investing in retail unit classes, capital appreciation will be affected by the impact of initial charges and you should therefore view your investment as a medium to long-term holding.