UK Equity Income funds upstage growth rivals
The compounding effect of reinvesting dividends has allowed the sector to beat IMA UK All Companies at its own game over the long-term.
By Joshua Ausden, News Editor, FE Trustnet
Wednesday May 30, 2012
Funds in the IMA UK Equity Income sector have outperformed their rivals in IMA UK All Companies over 10-, 15- and 20-year periods, according to FE Trustnet
While pure growth funds tend to leave their more defensively focused counterparts behind in rising markets, the compounding effect of reinvesting dividends has had a significant impact on the total returns of UK Equity Income portfolios in the long-term.
The longer the period in question, the greater the margin of outperformance; over 10 years, the average UK Equity Income fund has beaten the average UK All Companies fund by 3.9 per cent, over 15 years the margin is 37.8 per cent, and over 20 years the margin is 99.09 per cent.
Performance of sectors over 20-yrs
Source: FE Analytics
|3-yr returns (%)
|5-yr returns (%)
||10-yr returns (%)
||15-yr returns (%)
||20-yr returns (%)
|IMA UK Equity Income
|IMA UK All Companies
The strong run of cyclical growth stocks in the 2009 and 2010 QE-fuelled bull run has led to the marginal outperformance of pure UK growth funds over three and five years.
However, dividend strategies appear to be a better option for investors with a longer time horizon, even though these are compelled to sacrifice capital growth in order to keep their yield competitive.
Performance of sectors over 15-yrs
Source: FE Analytics
While UK All Companies funds dominate the list of top performers over 10 years, on an individual basis IMA UK Equity Income funds once again come into their own over longer periods.
Only one fund – Invesco Perpetual High Income
– makes it into the top-10 over the last decade, but over 15 years four funds make it into the elite group, even though there are more than twice as many funds in IMA UK All Companies than in IMA UK Equity Income.
As well as Neil Woodford’s two income funds, Rathbone Income
and Royal Bank of Scotland Equity Income make it on to the list.
Many look at UK Equity Income funds as a good source of regular income and choose to pocket the dividend each time it is paid out.
However, the impact of reinvesting dividends on long-term performance means that these vehicles should be looked upon as total-return plays in their own right.
Adrian Lowcock, senior investment adviser at Bestinvest, says there has been a shift in the way investors view the UK Equity Income sector in recent years.
"In the late 1990s and early 2000s, those who targeted income stocks only really did so for the dividend," he explained. "Because of the bull run in the follow-up to this period, the majority of those who wanted a decent total return looked to growth. Essentially, capital growth was seen as one thing and income as another."
"However, since 2008 the balance has shifted. In this low growth environment, the longer-term outperformance of equity income due to the compounding effect [of reinvesting dividends] is more attractive. Investors now know they’re unlikely to get dotcom returns and so are looking elsewhere."
Lowcock says fewer UK Equity Income investors now take the dividend, instead preferring to reinvest.
"I’d say only around 30 to 40 per cent retain the dividend," he claimed. "The majority of these investors are approaching retirement, but in general the culture has changed."