Mark Dampier: Equity funds prepare to get defensive
Saturday 18 July 2009
A key issue for many investors remains the boosting of their income. This has been partly satisfied for many by holding corporate bond funds, which have come back quite strongly after a very poor 2008.
Another traditional way to get a better income is through a UK equity income fund. These too have generally had a torrid time over the last couple of years, particularly those which had large weightings in banks. Many have also been hit by falling dividends and some funds have cut their payouts by as much as 25 per cent this year.
The JO Hambro UK Equity Income Fund is a prime example. It's a fund I reviewed in May, so thought an update may be useful. It has also been hit by dividend cuts – and expects to cut its income by about 10 per cent compared to last year – but this still leaves the fund on a prospective yield of 5.8 per cent. Given where UK interest rates are at the moment, this looks particularly good. In addition, the fund has performed extremely well compared to its peers in capital terms too, so investors haven't borne the full brunt of the market falls.
The fund managers, Clive Beagles and James Lowen, have adopted a very flexible investment style and moved the portfolio quickly into the areas they felt would perform best. So far they have done a good job and the fund is among the best performers in its sector over the past 12 months.
In the early part of this year, they reduced the fund's position in defensive sectors, which they felt were too expensive, and focused more on the economically sensitive – or "cyclical" – areas. Their decision has been fully vindicated as those parts of the market rebounded strongly and the fund benefited.
The managers' current views are that the policy response of the major central banks (and indeed politicians) means we won't see a "Great Depression Mk II". The big cuts in UK interest rates have meant consumers have actually been relatively well off this year, providing they still have a job. That said 2010 could be more difficult with cuts in public spending and higher taxes on the horizon.
The underperformance of defensive sectors has meant they are now reappraising this area. However, not all defensives are the same and they believe you need to differentiate carefully between them. They pick out Vodafone, National Grid, Centrica, GlaxoSmithKline and Sainsbury's as especially promising as these are not expensively valued and have yields around 6.5 per cent.
They still believe that some of the cyclical stocks are good value, and are focused on those with low valuations and depressed profits. They are looking for companies that can come back to peak earnings in two or three years' time and have balance sheets that are strong enough to survive the current difficulty. They are nervous that government spending may be cut in the coming years, so are wary of companies that rely heavily on state contracts.
They believe there are plenty of opportunities. They cite companies such as Lamprell (specialists in oil rig repair), which has seen a strong pick up in orders, plus Legal & General and Aviva in the life sector. In commercial property, they think both British Land and Land Securities offer attractive value. Each of their holdings has to earn a place in the portfolio. In fact, it's the survival of the fittest, as Clive Beagles puts it.
Investors are getting a highly pragmatic fund, which offers a very good yield. What is more, at around £150m, it's the right size to remain flexible to the changing moods of the UK economy and stock market. This looks like a fund very much on form and should be considered for any equity income portfolio.
Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independent
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
- 1 Scottish referendum: So how about the English now being given a chance to split from England?
- 2 Friends 20th anniversary: Alison Jackson photographs reunited cast
- 3 London council removes 'unacceptable' Stamford Hill posters telling women which side of the road to walk down
- 4 The response to my Pizza Express review has been overwhelming, and taught me a lot about journalism
- 5 Free U2 album: How the most generous giveaway in music history turned into a PR disaster
Scottish independence referendum: A nation divided against itself
Scottish referendum results: Cross-party consensus collapses amid Tory-Labour spat on the 'English question'
Scottish independence: David Cameron is becoming the 'George Bush of Britain'
Russia freezes Ukraine into submission: Kiev admits country doesn't have enough fuel for winter
Archbishop of Canterbury admits doubts about existence of God
Portuguese academic says British are 'filthy, violent and drunk'
iJobs Money & Business
£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...
Up to £100k or £450p/d: Saxton Leigh: My client is a leading commodities tradi...
£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...
To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...
Day In a Page
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize