As a sporting enthusiast there are many reasons why I look forward to the clocks going forward. Along with brighter evenings the sporting calendar properly starts to kick in as April brings us a number of great events such as the Boat Race, the Grand National, the final chase for the Premier League title and the US Masters Golf Tournament – all of which I will be following closely. 
However, as a portfolio manager with meaningful exposure to a number of mid-cap companies, the official beginning of British Summer Time has not always been as welcome in relation to fund performance.
This was particularly evident last year as the smaller FTSE 250 index underperformed its larger rival, the FTSE 100 index, by over 6 per cent in April. Cue several research notes arriving in my inbox advocating a switch out of mid-caps into large caps, with the only real reason I could think of being their already significant short-term underperformance.
With the benefit of hindsight the worst thing an investor could have done was to have sold mid-cap exposure to buy larger companies, given the strong performance of mid-cap companies over the subsequent year.
Performance of indices over 2014
Source: FE Analytics
As it transpired the hefty fall in medium-sized companies was primarily down to investors taking some healthy profits, although the period did serve as a timely exercise in to reconsidering reasons for owning particular companies and their respective valuations.
I also think this experience served to highlight the potential danger of basing your investment decisions purely on relative market capitalisations.
We like to consider our investments on a case-by-case basis. Whilst it is fair to say a number of medium-sized companies have performed well following the financial crisis, leading to a reduction in the number of investments offering dividend yields greater than the broader market, we are not currently in a situation where there is a shortage of ideas.
Companies in the portfolio such as satellite business Inmarsat, construction group Kier, telecoms company TalkTalk, non-life insurer Amlin and trading platform IG Group are examples of FTSE 250 businesses that offer above average yields with good prospects for dividend growth.
A dominant feature of the income landscape in the UK equity market is the degree of concentration in dividends, with the top 20 contributors representing over 60 per cent of the UK market’s overall dividend.
Over the past five years of managing the fund I have had meaningfully less exposure to this area of the market as I have felt there are better income opportunities further down the market cap spectrum, particularly in terms of the longer term dividend growth on offer.
I continue to believe that better dividend growth can generally be found outside some of the largest income contributors. However one area that I think will emerge as a larger dividend paying area is the banking sector. We think the dividend make-up of the UK market will begin to evolve over the next few years.
Take Lloyds Banking Group, for example, which has finally returned to the dividend register after several years of absence. The recent announcement to pay a dividend of 0.75p per share may seem small to many. However, this equates to a payment of over £500m.
Given the UK market pays a dividend of approximately £80bn, the payment by Lloyds is not an insignificant figure. Over time we anticipate that Lloyds will continue to grow its dividend and therefore will become a large contributor to the market’s dividend causing many investors to dust off their models after many years.
We are also confident of the dividend growth prospects at Barclays as we see scope for the company to increase its pay-out ratio as the bank achieves higher returns on equity going forward.
Outside of banking the portfolio continues to have a material weighting in other financial companies as again in our view there are good prospects for dividend growth in areas such as insurance and real estate.
A great example is Asian focused life insurer Prudential. Whilst investment in the business has never typically rewarded investors with the highest initial dividend yield, the company has managed to consistently deliver above average rates of dividend growth, with a near doubling of the dividend following the financial crisis.
Stephen Message is manager of the Old Mutual UK Equity Income fund. The views expressed above are his own and should not be taken as investment advice.