Equity income funds have traditionally performed well in times of economic uncertainty as they tend to have a bias towards less economically sensitive businesses. Often the duller, more stable companies have higher levels of payout than growth-oriented businesses, and it is usual for equity income funds to outperform at times of an economic downturn, especially if this coincides with interest rates being cut.
The traditional aim of equity income funds was to deliver a cheque to investors that they would live on. This was done by putting together a portfolio of shares that yielded above the market average. Some managers now try to give themselves more flexibility by adopting a ‘barbell’ approach to portfolio construction, where the manager seeks to create an above-average income by combining stocks with strong growth prospects together with those that pay significantly above-average yields. This has delivered mixed results and is highly dependent on the stock selection skills of the manager.
As economic and market conditions change, so will the type of funds that are likely to deliver the best returns, meaning advisers need to be on top of the current strategies being employed in the funds they select.
In a low-growth environment, stocks that are able to grow their dividend, rather than just pay an above-average yield, look likely to continue to deliver the best returns. Correctly selecting these is dependent on the skill of the manager in carrying out thorough fund research.
O’Neill has selected the top three funds to watch in the following categories: three-year performance, best newcomers and top performers in assets under management.
