UK - price is right, for income and capital growth
So what is the exceptional value which encouraged the hedge funds to start buying equity income in Summer 2010? Though hedge funds are renowned for taking a long view, it is history which highlights the value.
In the first table here we look at one long term measure of the stock markets valuation. At the left hand side is the column ranked 5-10, and a valuation in this range means the stock market is cheap. If you invested at such levels in the past, history says that in the subsequent 10 years your average return per annum exceeded 10%. At the right hand side of the graph you can see that this also works in reverse.
In the 2nd graph here we show the interesting bit. You can see where circled that right now there is not outstanding value (that was March 2009) but there is nonetheless an extremely good opportunity for returns of around 8% per annum over the next 10 years. (Out of interest you can see the sharp spike in the chart around 1999/2000, providing a clear warning to investors).
The weakness of this analysis is that it is not a precise timing tool. It does not tell you that the stock market won’t get even cheaper in the year ahead. But it clearly illustrates that for someone with a 10 year time horizon, the likelihood of a decent outcome is very much in your favour.
This analysis is utilised by the Schroder Income team, and this has been one of the outstanding equity income funds over the last decade.
They use this method to identify lowly valued companies, in robust financial health, and where the dividends might be depressed, but have significant potential to grow.
The current yield is 3%, and there is considerable potential for the payout to grow in years ahead. A medium risk fund.
(Taken from TopFunds Guide January 2011)