It’s something we’ve heard over and over again in recent months, from fund managers and fund pickers alike: there are good quality companies out there compounding dividend year-in and year-out, and these are the safe havens. But does that make equity income the new “risk-free” asset?true
According to the stats, funds in the UK Equity Income sector achieved net retail sales of £358m in April – the highest figure since April 2007, and well above the monthly average of the past 12 months of £98m.
Discount broker Hargreaves Lansdown lists the well-established behemoths £5.5bn Artemis Income, £10.3bn Invesco Perpetual Income and £13.6bn High Income among its bestsellers for the month, alongside Troy Trojan Income, JO Hambro UK Equity Income and Threadneedle UK Equity Alpha Income. The usual suspects, such as GlaxoSmithKline, Royal Dutch Shell, HSBC and BP, feature heavily in these funds.
Happy at home
It seems that after years of extolling the virtues of a globally-diversified portfolio, investors remain very happy to stay at home during a bull rally; the FTSE is after all the most international of all major equity indices. Still, could we be underestimating the risks?
“These are not risk-free assets at all, just perhaps the least risky of all risk assets at the moment, but that’s where the market is,” says Adrian Lowcock, senior investment manager at Hargreaves Lansdown.
“It’s the same in the US as well where we are seeing good quality companies with reliable dividends starting to attract a premium and I think that theme is going to continue. They are expensive relative to recent history but not necessarily expensive longer term. In the US they are on P/Es of 18-20x earnings which looks more expensive to recent history, but longer term not so much.”
He adds: “That’s how markets change – what was once in favour went out of favour and people perhaps not looking back as far as they should and to remember what valuation you should give a company that has grown its dividend year in year out above inflation. That’s what is valuable at the moment and will continue to be so for some time.”
In the UK this ‘safety in numbers’ mentality is reflected in both stock and fund choice, hence the popularity of the likes of Neil Woodford‘s Invesco Perpetual funds, though the big funds lose out on other fronts… that’s a story for another day though.
Elsewhere, find out why ETFs have also been proving popular with investors.
