Once a mainstay of many portfolios, UK equity income funds are now often viewed as dark fashion, in a world that is still thrilled to the glamor of US tech stocks.
But there are reasons to take a fresh look at these funds and trusts, which may have some international holdings, but tend to focus on these shores.
Shares in British companies are regarded by many as undervalued, or even bargain buys. This is certainly the view of private equity hunters.
This represents an attractive opportunity, as long as you are prepared for the shocks that could lead to a slowdown in inflation and economic recovery.
Big oil: BP and Shell cut their splits last year but are paying off again
Meanwhile, dividends are expected to generate more than 3 percent of earnings. This is attractive when deposit accounts are paying as low as 0.01 percent, and the purchasing power of cash is declining with inflation.
According to investment managers Janus Henderson, UK dividend payouts may still be below their pre-pandemic levels, but they rose by 61 per cent in the first half of the year.
If this still sounds sluggish (I like slack, but I know it’s not to everyone’s taste) then you might be more interested to know what the prices of many of the 22 UK equity income investment trusts are. are at a discount to the value of their net assets. This means that you are buying the underlying asset cheaply.
And they served their savers well when dividends were canceled, or cut, in 2020.
James Carthue of research firm Coated Data points out that trusts – some of which have paid dividends every year for the past half century – have failed to maintain their revenue reserves, or even slightly increase their payouts. used for.
Law debentures, which have a dividend yield of 3.74 percent, and Murray Earnings, yielding 3.9 percent, lead the field in Carthue’s ranking of these trusts. Their league tables are based on continuity of capital and earnings growth and dividend payouts. Yet they are at a discount of 2.66 percent and 6.67 percent respectively.
Law Debentures has a professional service arm. This generates an income that ensures that the trust’s managers James Henderson and Laura Fall are not obligated to venture into stocks that are risky or have little growth potential. Henderson & Foll seeks ‘high quality companies with strong competitive advantages at attractive valuations’.
Although Law is owned by debenture oil giants BP and Shell, it also has a stake in Ceres Power, which is taking advantage of the switch from hydrocarbons to hydrogen.
Murray Income, which has increased dividends for the past 48 years, has stakes in AstraZeneca, Close Brothers and Diageo. The manager, Charles Luke, explains that shares that match the trust’s stock-selection criteria are those with properties that make an ideal private equity acquisition. But although this prospect of lucrative takeover offers could set the pulses racing, the thrill-seeking isn’t usually the talk of the UK’s equity earnings sector.
The vibe is more about reassurance and firmness. For example, Carl Stick, manager of Rathbone Income Fund, says he favors companies that are ‘paying off debt, reinvesting for the future and offering a sustainable income stream’.
He continues: ‘The UK is cheaper than other markets.
We are investing in sectors like financials. We’re also in Big Oil — BP and Shell slashed their dividends last year, but they’re paying off again.
‘Of course, I’m biased because I run an equity income fund, but we offer a yield of 3.7 percent, when the best rate you can earn from a fixed-rate bond is 0.7 percent.’
Stick says that ESG (environmental, social and governance) considerations will, at most, determine the UK’s equity earnings holdings. For the time being, some investors may shy away from including British American Tobacco and Imperial Brands in funds such as City of London (which has a yield of 5.2 per cent), MAN GLG Income (4.64 per cent) and Royal London UK Equity Income (2.97). Percentage) which are Interactive Investor’s three choices.
Imperial Brands also appears in the portfolio of Threadneedle UK Equity Income (2.83 percent), which is one of AJ Bell’s top-rated funds. Another component is Morrisons, the supermarket that is the subject of proposals from two private equity players. Morrison’s fate will be decided at an auction today.
Artemis UK earnings (3.47 per cent), a Hargreaves Lansdowne favourite, provides Tesco with exposure that other private equity bidders may have in sight, but also BP, Barclays and Smith Group whose technologies ‘enable modern life’.
A feature of the afterlife is bound to be inflation, either fleeting or long-lasting.
Dzmitriy Lipsky of Interactive Investor argues that ‘a broad, well-diversified global equity portfolio is the ultimate inflation hedge’.
A UK Equity Income Fund or Trust may be part of this buffer.
Boring, maybe. But is this such a bad thing?