Mark Dampier: Equity income funds worth the risk

The Analyst

Markets are again falling. Having seen a big snap back of over 20 per cent, the unremittingly gloomy economic news has now finally got the better of them again. Those who haven't seen a recession before (and you have to be at least 40 years old to remember the last one) there is a huge shock being administered. However, interest rates, which have already been slashed to 3 per cent, will in my opinion fall further – quite possibly to 1 per cent or below. To my knowledge, they have not been that low for the 300-plus years that the Bank of England has been in existence.

Borrowers and mortgagees may be celebrating the idea of interest rates coming down to these levels, but those of us with savings will think somewhat differently. If rates do fall as low as 1 per cent, instant access accounts will only be paying around 2 per cent – and that's a gross figure too. Everyone needs a store of cash that is accessible, so we'll just have to accept that there will be a lower return. However, those with excess cash should, as I suggested a while ago, look at both gilts and corporate bond funds.

Those who feel comfortable with taking on more risk should seriously consider UK equity income funds. Some are now yielding over 6 per cent net. While a recession clearly means there will be some dividend cuts, I do believe that the best fund managers will avoid the worst. One such is Karen Robertson at Standard Life, who has managed their UK Equity High Income since 1995.

This is a highly competitive sector with some of the very best UK fund managers, but even in this exalted company Karen Robertson has stood out. She has a long-term track record not only of excellent capital performance but of rising dividends too. Despite this, she is far less well known than such managers as Neil Woodford at Invesco Perpetual, Adrian Frost at Artemis or Tony Nutt at Jupiter. Her abilities deserve greater recognition, and in any case it is sensible to hold a portfolio of perhaps six or seven equity income funds.

Standard Life Investments has made impressive inroads into the world of investment over the past few years under the chief executive Keith Skeogh and the head of UK equities David Cumming. They believe that changes in company expectations drives outperformance, and therefore perform analysis to identify change at an early stage. They also use proprietary tools (known internally as the matrix) to follow share price characteristics based on 11 factors. This is in addition to their "winners list", which includes the favourite 20 stock ideas from the UK team among large and medium-sized companies.

A combination of the winners list and matrix has, over the years, added plenty of value to their stock picking. Karen Robertson is currently focusing on the sustainability of company earnings and finding those that require no debt refinancing. The portfolio contains 50 stocks (the lowest it has been for some years), which is basically due to the fact that she has moved more into larger companies. Her portfolio is heavy in defensive areas such as tobaccos and utilities; the biggest holdings include British American Tobacco, which is showing price increases and cost savings. Meanwhile, Royal & Sun Alliance is a big beneficiary of the meltdown at US insurer AIG, and BP of course has a tremendous yield. The fund yields 5.1 per cent at the moment

Some people may think investing in the stock market is totally insane at the moment. But I firmly believe that good money can be made over the next few years, by picking up stock now on the bad days. In the meantime, a good yield, which will look amazing in the coming months as interest rates are slashed further, makes this fund worthy of a place in any 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