Mark Dampier: 'Equity income pays our way as we wait for shares to recover'

While it's never fun to see your capital fall in value, equity income at least provides a regular return in the form of dividends

Global stock markets have had their worst start to the year in a very long time, bringing our investments into sharp focus. Amid such volatility, where should we place our capital?

The first option is cash, which isn't affected by the performance of the markets and is perceived to be the safest of all investments. For that reason, everyone should ensure they maintain sufficient cash savings.

Aside from this, readers of this column will know I have always been a fan of equity income – and market volatility reminds me why. While it's never fun to see your capital fall in value, equity income at least provides a regular return in the form of dividends. If your portfolio includes a selection of dividend-paying shares, you are unlikely to end up with nothing.

As most investors require income to live on as they get older, equity income funds should surely form the bedrock of most investment portfolios. In my view, it's a good idea to invest in a number of them – and to look for different management styles as there is little point buying a range of funds if their money is in the same holdings.

The JO Hambro UK Equity Income fund, run by Clive Beagles and James Lowen, is positioned quite differently to most of its peers in that it has greater exposure to the mining, oil and financial sectors. While the managers have a great long-term record, this positioning means the past year has been hard for them.

Their focus on identifying undervalued areas of the market has led to the fund having a 38 per cent weighting in financials, against 26 per cent for its benchmark, the FTSE All-Share index.

Mr Beagles believes banks are currently valued close to their historic lows but also that now the general election is behind us, "bank bashing" is beginning to abate.

In recent years, UK banks have rebuilt their capital and are now looking far stronger than they did in 2007. In due course, for example, Mr Beagles believes Lloyds will be able to provide a high and growing dividend.

In mining, he says valuations are at unprecedented lows – a reverse of what we saw in 2007 following the commodity boom. While he expects some miners to cut their dividend, such as BHP Billiton, he believes others, like Rio Tinto, will stay the course. Furthermore, he feels most of the bad news is already reflected in their share prices.

In the oil and gas sector, which is also unloved, lower demand and increasing supply will eventually come to equilibrium, which is why he also sees opportunities here.

The managers do also own some of the more traditional defensive stocks, although this exposure is probably far less than in many other equity income funds. The largest holdings currently include Vodafone and the drug giant AstraZeneca.

Overall, JO Hambro UK Equity Income provides exposure to UK companies of all sizes. Larger ones are well represented in the portfolio and the managers also continue to hold a decent portion in smaller businesses. Medium-sized companies are also held, although exposure has recently reduced on account of higher valuations.

To conclude, here we have a fund doing something quite different to most other equity income stalwarts, meaning it could dovetail well with managers such as Neil Woodford.

While many investors have recently favoured the perceived safety of higher-quality, defensive companies, JO Hambro UK Equity Income offers exposure to undervalued and under-rated companies whose shares could bounce once they return to favour.

The fund currently yields an attractive 4.75 per cent, so should market volatility persist, investors are at least being paid to be patient with a regular income. The fund's dividend growth over the years has also been excellent.

I believe equity income allows investors to worry less about capital fluctuations in the short run and, in the meantime, enjoy the income until share prices recover.