Wait: they will come out of their shells

Steady growers rather than top performers, equity income funds still have an impressive track record in good times and bad. Jenne Mannion considers their attractions for ISA investors

Each spring, in the run-up to the end of the tax year, fund managers launch a flurry of ads to try to persuade us to invest our £7,000 individual savings account (ISA) allowance with them.

Each spring, in the run-up to the end of the tax year, fund managers launch a flurry of ads to try to persuade us to invest our £7,000 individual savings account (ISA) allowance with them.

There has usually been a theme running through each of these so-called ISA seasons. Popular funds hyped by managers in the past have included European (1999) and technology (2000) funds, with exotic hotspots such as Japan, Latin America and China cropping up along the way.

Although this year's season has yet to take on a distinct character, one type of fund that has proved perennially popular is sure to feature: UK equity income. The name might be convoluted but these funds have two simple objectives.

The first is to deliver an income stream for investors - who can choose to take out their money or reinvest it - and the second is to grow capital via a higher share price.

In a nutshell, the income investors receive comes from dividends paid by those companies in which the manager has invested. So, a wise manager's choice should yield healthy dividends each year.

Rising dividend payouts may also indicate a rise in profits at the companies concerned. If this is the case, prices for the shares held in the fund manager's portfolio are also likely to rise, increasing the value of investments for their clients.

"UK equity income funds are excellent long-term holdings, whether an investor needs to take the income or has it reinvested," says Tim Cockerill of independent financial adviser (IFA) Rowan & Co. "The key is that these funds do both jobs."

A major study published last week confirms that, over the longer term, investing in companies that pay dividends is one of the best ways to get healthy returns. Barclays Capital's Equity Gilt Study - now in its 50th year - reveals that, had you invested £100 in UK equities back in 1899, it would have been worth just £170 in real terms at the end of last year. But if the income generated had been reinvested, the portfolio would have grown to £18,875.

After the technology bubble burst in 2000 and during subsequent bear markets, equity income funds held up well in comparison with many others. However, Mark Dampier of IFA Hargreaves Lansdown points out that they will not always deliver the best returns over a shorter period.

"Equity income funds are like the tortoise rather than the hare - they may go slow, but they are steady. There will be times when they are left behind but they will eventually catch up and overtake, as history has indeed proven," he says.

One reason for the funds' robust long-term performance is that, by nature, dividend-paying companies tend to be mature and well-established. You will find very few racy, speculative shares such as those associated with hi-tech science, nestling inside them. Instead, expect to see steady growers such as tobacco, oil, telecoms and power companies.

"British companies increased their dividends by an average 7.5 per cent last year but in certain areas of the market the dividend growth has been far stronger," says Anthony Nutt, manager of the Jupiter Income fund. One example is Vodafone, which doubled its dividend payout in 2004.

Another reason for the funds' success is the dividend itself. Mr Dampier says the average equity income fund returns a dividend of 3.5 per cent a year. This gives such funds a head start on those in other sectors; even if the stock market were to move sideways over the year, investors in equity income funds would be 3.5 per cent ahead.

Adrian Shandley, an adviser at Premier Wealth Management, describes the dividend as an insurance policy: "In falling markets you are getting a safety net; in flat markets you are getting some return, and in rising markets the dividend is an added bonus on top of the share price growth."

A handful of equity income funds have been consistently strong performers over many years. Mr Dampier's recommendations include those from Jupiter, Artemis and Invesco Perpetual. Both Mr Shandley and Mr Cockerill like Newton Higher, Rathbone and Schroder.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...

    Ashdown Group: IT Manager / Development Manager - NW London - £58k + 15% bonus

    £50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...

    Recruitment Genius: Sales Consultant / Telemarketer - OTE £20,000

    £13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...

    Ashdown Group: Training Programme Manager - City, London

    £40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...

    Day In a Page

    Where the spooks get their coffee fix: The busiest Starbucks in the US is also the most secretive

    The secret CIA Starbucks

    The coffee shop is deep inside the agency's forested Virginia compound
    Revealed: How the Establishment closed ranks over fallout from Loch Ness Monster 'sighting'

    How the Establishment closed ranks over fallout from Nessie 'sighting'

    The Natural History Museum's chief scientist was dismissed for declaring he had found the monster
    One million Britons using food banks, according to Trussell Trust

    One million Britons using food banks

    Huge surge in number of families dependent on emergency food aid
    Excavation at Italian cafe to fix rising damp unearths 2,500 years of history in 3,000 amazing objects

    2,500 years of history in 3,000 amazing objects

    Excavation at Italian cafe to fix rising damp unearths trove
    The Hubble Space Telescope's amazing journey, 25 years on

    The Hubble Space Telescope's amazing journey 25 years on

    The space telescope was seen as a costly flop on its first release
    Did Conservative peer Lord Ashcroft quit the House of Lords to become a non-dom?

    Did Lord Ashcroft quit the House of Lords to become a non-dom?

    A document seen by The Independent shows that a week after he resigned from the Lords he sold 350,000 shares in an American company - netting him $11.2m
    Apple's ethnic emojis are being used to make racist comments on social media

    Ethnic emojis used in racist comments

    They were intended to promote harmony, but have achieved the opposite
    Sir Kenneth Branagh interview: 'My bones are in the theatre'

    Sir Kenneth Branagh: 'My bones are in the theatre'

    The actor-turned-director’s new company will stage five plays from October – including works by Shakespeare and John Osborne
    The sloth is now the face (and furry body) of three big advertising campaigns

    The sloth is the face of three ad campaigns

    Priya Elan discovers why slow and sleepy wins the race for brands in need of a new image
    How to run a restaurant: As two newbies discovered, there's more to it than good food

    How to run a restaurant

    As two newbies discovered, there's more to it than good food
    Record Store Day: Remembering an era when buying and selling discs were labours of love

    Record Store Day: The vinyl countdown

    For Lois Pryce, working in a record shop was a dream job - until the bean counters ruined it
    Usher, Mary J Blige and Will.i.am to give free concert as part of the Global Poverty Project

    Mary J Blige and Will.i.am to give free concert

    The concert in Washington is part of the Global Citizen project, which aims to encourage young people to donate to charity
    10 best tote bags

    Accessorise with a stylish shopper this spring: 10 best tote bags

    We find carriers with room for all your essentials (and a bit more)
    Paul Scholes column: I hear Manchester City are closing on Pep Guardiola for next summer – but I'd also love to see Jürgen Klopp managing in England

    Paul Scholes column

    I hear Manchester City are closing on Pep Guardiola for next summer – but I'd also love to see Jürgen Klopp managing in England
    Jessica Ennis-Hill: 'I just want to give it my best shot'

    Jessica Ennis-Hill: 'I just want to give it my best shot'

    The heptathlete has gone from the toast of the nation to being a sleep-deprived mum - but she’s ready to compete again. She just doesn't know how well she'll do...