A huge flow of investors’ money saw the sector swell by £500m, making it the most popular sector for that month.
The recent gains in the FTSE 100 make the sector’s popularity warranted, according to Mike Deverell (pictured), investment manager of Equilibrium Asset Management.
“With markets at reasonable highs it might be sensible for investors to go toward what is traditionally a more defensive sector,” he said. “Investors seeking income are putting their money into the UK Equity Income sector instead of bonds.”
“There is a great search for yield at the moment with a lack of yield in fixed income, especially at the safer end of the spectrum.”
“The yield produced by UK equity income funds gives you some cushion if markets falls and you will usually have more defensive companies that will tend to do better in a more defensive market.”
Deverell says the increase in popularity for the sector could be partially due to some investors taking profits from small and mid cap funds in the past few months.
“For investors taking money off the table from small and mid cap funds that have done really well over the past few years the sector is an obvious place to re-allocate it.
“Particularly as we saw in April, mid caps took a bit of battering; investors might want to buy back into larger caps.”
Since the beginning of the year the FTSE 100 is up 3.17 per cent whilst the FTSE 250 is up just 0.47 per cent. Both indices suffered losses after a small market correction in April but the mid cap focused FTSE 250 took a deeper loss after rallying in recent years.
Performance of Indices in 2014
Source: FE Analytics
“The increasing popularity for the UK equity income sector may even be why the FTSE 100 has risen recently,” Deverell added.
“It shouldn’t be a cause for worry as long as investors are diversified and don’t just hold one or two funds. The danger is where funds look quite similar.”
“If you hold multiple funds in the sector they should complement each other and not look the same in terms of their top ten holdings.”
The surge in flows to the sector may be down to the recent heave of activity in mergers and acquisitions, most notably between the two pharmaceutical giants Pfizer and AstraZeneca, according to Chris Spear (pictured), managing director of Spear Financial.
“Whether we are back to more M&A or not, the increased popularity of the sector is probably a reflection of a pick-up in equity markets,” he said. “With interest rates still low, dividends form part of the step back into stock markets for income investors.”
“It is being driven by an increase of appetite for risk. Bonds are not a disaster but UK Equity Income is a good alternative for those who want to bank dividends.”
“There continue to be an appetite for income producing funds and when share prices are a bit flat at least you have got a decent yield in when you own an UK equity income fund.”
Spear anticipates that dividends are less likely to grow, but he says they are not going to fall away either.
“In strongly rising markets you want to be in growth funds but in a reasonably uncertain market an equity income fund ticks boxes for a broad range of clients and are unlikely to let you down.”
“With the anticipation around interest rates, investors are thinking about how they can produce an income.”
“Investors may be getting over their reticence that stocks may be able to deliver this income.”
Denis Hall, managing director of Yellowtail Financial Planning says investors shouldn’t be worried about the increased popularity of the sector as long as they are prepared to invest for the longer term.
“Volatility on its own isn’t a big issue until you sell. It’s a good sector as long as you are prepared to invest for the future or those who realise there is a trend and they are prepared to follow a market trend and get out at the first signs of a wobble.”
“However, if interest rates rise this will hurt the corporate sector as companies won’t be able to sell their goods quite as easily as their markets won’t be as big and if they want to borrow money they won’t be able to do so quite as cheaply.”
He says in in this case the stocks that are paying reasonable dividends will become more popular.
“As these stocks are usually those that held by the UK Equity Income sector this will actually further support it, rather than threaten it.”
Taken as a whole, net fund retail sales in the IMA were £2.9 billion, the highest level since April 2011.