The Bank of England Governor, Mark Carney, has seen his forward guidance policy unravel quickly due to rising employment numbers, but I am not sure the outlook for interest rates has changed significantly.
The next move will be up, but whether it is the end of this year, as some suggest, or after the general election in May 2015, which is my personal view, the more interesting point is how far they will ultimately rise and what they will peak at. My best guess is somewhere between 2 per cent and 3 per cent. If this is the case then equity income still has plenty of long-term attractions for investors. Net yields are over 3 per cent and I would expect to see some growth in this too.
The Trojan Income fund has grown from a minnow of £50m in 2009 to £1.5bn now. The growth is not impeding its style of management though. The number of holdings remains steady at around 45, in a conservatively positioned portfolio aimed at limiting some of the volatility that is associated with equity investing.
Francis Brooke, the manager, is focused on businesses with strong brands and effective barriers to entry – features which could help to deliver stable revenue streams throughout a market cycle. He has biased the portfolio towards sectors he feels best represent these characteristics, including consumer goods, utilities and non-bank financials.
Within consumer goods, currently around a quarter of the portfolio, there is a bias towards high-yielding, larger companies such as Unilever and Imperial Tobacco. Mr Brooke has, however, sold a number of positions in the sector where share prices have risen and valuations look stretched, including Diageo, Britvic and Associated British Foods (owner of Primark). Profits have been recycled into stocks he sees as more attractively valued, such as Lloyds Banking Group. Mr Brooke believes it will deliver earnings growth in the coming years, and be fully privately owned and dividend-paying in the near future.
BSkyB was also purchased last year after a period of price weakness. In his view the company has a powerful brand, a high level of service and a good relationship with customers. It is currently yielding around 3.5 per cent, which he expects to grow.
Mr Brooke also sees value in less popular areas of the market, like the oil and gas sector. He finds BP interesting as the fallout over the Macondo well disaster should end over the next 6 to 12 months as claims are settled, and views the shares as cheap on a P/E ratio of about 10x and a yield of 5 per cent. He also expects more merger and acquisition activity within the sector to drive prices higher.
Elsewhere, like many income funds he holds AstraZeneca and it has been positive for the fund. He still thinks there is room for growth, with the worst of the bad news surrounding patent cliffs over and a pipeline of new drugs. The fund also has 9 per cent in overseas stocks, mainly in the US.
Its attempt to deliver lower than average volatility with a rising income has by and large been achieved since launch, and this should be an ideal fund within SIPPs and ISAs as a core holding.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit hl.co.uk/independent