The Analyst: This Standard profits from change

Equity income funds have traditionally been among the most popular areas for UK investors. The best known managers such as Neil Woodford at Invesco Perpetual and Adrian Frost at Artemis tend to hog all the press coverage (indeed I've mentioned them both before in this column). One good fund that often goes overlooked is the Standard Life UK Equity High Income Fund which is run by Karen Robertson.

The fund looks to me solidly placed for 2009. The investment approach is similar to Standard Life's other funds, except of course that Ms Robertson has a yield requirement. She therefore uses their in-house stock ranking tool which looks at 10 factors that influence share price performance. Unfortunately that system didn't work well last year mainly because, like most statistical models, it doesn't work too well when things are changing quickly.

Much of Standard Life's investment effort looks at what they call "focus on change", which basically looks for movement in company expectations. The size of their operation also enables them direct contact with the UK's biggest companies, which can often lead to superior information flow.

The search for income is becoming ever-more important, indeed now that the banks have scrapped their dividends there are fewer stocks out there to choose from. Karen Robertson has a degree of flexibility in this fund because she can actually invest around 20 per cent of the portfolio in lower-yielding stocks. That said the present portfolio yield is 5.4 per cent and she managed to increase it by about 5 per cent to February 2009. She believes for next year she will at least be able to maintain this yield, which would be great news for savers who have seen the return on their cash slashed recently.

I was particularly interested to see one of her top overweight positions in the portfolio. When I say overweight I mean in comparison to its position in the index. She has 1.9 per cent of the fund in Provident Financial (which yields 7.5 per cent).

This is a company which mainly loans money to the poorest people in society. The company itself is well funded and their customers, because they typically have no mortgages and live off benefits, haven't actually seen much of a deterioration in their finances due to the credit crunch.

Tullow Oil is an example of a low-yielding share that Ms Robertson holds in the portfolio because it has a great management team and the company has made some tremendous oil finds over the last few years. Another overweight position is W H Smith, a company a few years ago which was almost completely written off partly because it was trying to do a bit of everything. However, over the course of 2008 it grew its dividend by 15 per cent and its reliance on relatively inexpensive items is a plus in this environment.

The demise of some high-street retail chains has given their surviving competitors a real chance to prosper. HMV is a prime example, which is in the perfect position to pick up additional customers following the death of Woolworths and Zavvi (formerly Virgin Megastores).

Like many other fund managers in the sector, Karen Robertson has significant investment in the tobacco sector, which of late has not done quite so well. However, given the difficult economic background, tobacco firms offer relatively stable earnings and a good yield most importantly it is an income that can grow.

I think it is impossible to reliably call the bottom of the stock market (although if you really want to know, my own view is that we probably haven't reached it yet). Nevertheless, in my opinion equity income investments are a great way to invest for the long term and this fund has an excellent mix of shares. Just as importantly it has a yield which is at least four times more than you can earn on most cash accounts (albeit without the capital guarantees). I remain of the view that equity income funds should be a core part of most investors' portfolios.



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

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