“Furthermore, record-low bond yields have lifted the share prices of many bond-like sectors. These seem to have become crowded with yield-seeking investors, leading to valuations becoming stretched in relation to underlying fundamentals.”
Burdett picks out the £364m Chelverton UK Equity Income, £621m Majedie UK Focus and £230m Ardevora UK Income funds as ones to watch under £1bn.
He also likes the larger £2.8bn JOHCM UK Equity Income, run by Clive Beagles and James Lowen, for its “forensic focus” on dividends, including forecasting and regular investor updates.
“That is key because dividends have been rising quite strongly, to the point where dividend cover is patchier,” he says. “Part of this is down to UK companies such as Vodafone issuing special dividends or adopting US-style share buybacks.”
He adds: “The outlook for dividend growth is more complex at the moment than it has been for a good few years. We still believe there is good dividend growth to be had but you need to know your manager and fund in that regard.”
Shell shock
Announced in April, Royal Dutch Shell’s acquisition of BG Group certainly gives UK equity managers something to ponder, given the merged company will make up close to 10% of the FTSE 100.
The wider mining and minerals sector also splits opinion among UK commentators; it has recovered to some extent this year, as has the oil price, but many managers remain reticent to invest.
“The big sectors in the UK are all quite important to the income funds, be it banks, mining and minerals and pharmaceuticals, all are historically important dividend payers; though banks let the side down recently,” adds Burdett.
“Will mining and minerals follow suit? This is a key question for the big funds, which will all have exposure to these sectors.”
