Decade of growth and income

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Some headlines over the holiday period would have you believe the last decade had been awful for investors. It wasn’t. Yes it was tough, but...

So instead of another list of 10 or 20 things to worry about in 2010, in the table below we show how some of the most popular funds in the equity income sector have performed over the last decade, and then underline the very positive  outlook.

Equity Income Funds - 10 Year Performance

Bottom line?

The equity income funds that investors have been buying in scale have been just fine. As you can see in the table, these bigger funds, some huge, have rewarded investors, not just in absolute terms, but also compared to other alternatives. For example, the growth-focussed funds in the UK All Company sector on average performed worse than the stock market as a whole.

why did big funds outperform?

A key reason for these bigger equity income funds also outperforming their own sector average is because they tend to have a greater weighting in the larger, safer, UK quoted businesses with a global franchise.

Interestingly, many such businesses were overlooked in the stock market rally of 2009, but we believe that trend has already begun to reverse. This is reflected in the Newton Higher Income fund (with a heavy focus on multinational heavyweights) being 4th quartile over 1 year, but a much more positive 1st quartile over more recent periods.

positive outlook

On many occasions we have highlighted the attractions of buying higher yielding shares through equity income funds. And this overview of the last decade could not be clearer in highlighting their successes, and the key role of reinvested dividends in driving performance. Looking forward the outlook remains very positive, both short and longer term.

Looking at the short term, not only did the Newton Higher Income increase the payout by nearly 20% in 2009, but the manager Tineke Frikee is expecting a little more income growth in 2010, even though the yield is already a chunky 7% gross.

No sooner was JOHCM UK Equity Income projecting an increase of 5-7% in their payout for 2010 when four of their holdings announced dividends even higher than expectations, very encouraging.

The JOHCM fund was in top place for total return (growth plus reinvested dividends) in 2009, followed by BlackRock UK Income, and Schroder Income – these three funds up are 40.36%, 37.96% and 35.87% respectively (the sector average was just 23%), and all remain optimistic. The gross yields are 4.41%, 3.6%, and 4.2% respectively.

massive longer term potential

There is a risk as we focus on the short term that we miss the powerful long term, secular, changes driven by unfolding demographics.

The chart here shows the growing dependency ratio in a number of key countries – the ratio is the number of retirees per 100 people aged 15-65. This is not a parochial UK tendency, but a global one (India probably being the main exception, due to its remarkably young population).

Now think of this chart another way - it vividly illustrates the inexorable rising demand for income. The search for reliable income will be all the greater in countries like the UK, as final salary pension schemes close, and the Government reduces State benefits for the retired (by hook or by crook!).

In the years and decades to come high yielding shares, those with reliable dividend flows, will increasingly attract premium values, and the equity income funds that invest into them should be at the heart of portfolios (even for investors with a growth objective, to capture the powerful impetus provided by the reinvestment of dividends).

And while capital values might go up and down, remember dividend payouts are always positive.

spread your net wide

If you are a bit nervous about the UK economy you should remind yourself that the UK stock market is not representative of the UK domestic economy. Only about 30% of the earnings of FTSE 100 companies are generated in the UK.

Nonetheless to buy funds solely focussed on the UK stock market is to miss out on a wide range of opportunities - 90% of the worlds high yielding shares are outside the UK. Consider these favourites:

Sarasin International Equity Income (yield 4.9%) unashamedly focuses on quality businesses with limited debt, and the commitment and ability to grow the payout, and in 2009 the payout increased by 15%. During a year of transition, with the global economy slowly coming off life support, this fund is attractive.

Newton Asian Income fund surprised on the upside again. The manager was cautious earlier in 2009, but the payout over the calendar year is up 5% compared to 2008, and there should be a further increase in 2010. Similarly with Ignis Argonaut European Income, payout up 3.62% in 2009. The respective yields are 4.6% and 5.6%.

 (Taken from TopFunds Guide January 2010)

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