Many fund managers and advisers have switched into more economically sensitive stocks in recent months that are on cheaper valuations. Some have even voiced concerns about a bubble in equity income forming.
However Lowcock (pictured), senior investment manager at Hargreaves, thinks the concerns are premature.
"High-quality, income-paying stocks have had a good run, but it’s only recently that they’ve outperformed," he said. "They’re expensive relative to what they were in the late 1990s and the period up to 2008, at a time when they were relatively out of favour. Prior to that, they’ve always tended to trade on a premium."
Lowcock says the dotcom bubble bred a "get rich fast" mentality in investors for many years, and he believes it is still a factor even now.
"Up until 2008, investors were still looking to make supernatural returns," he said. "In the lead-up to the dotcom bubble and financial crisis, people made a lot of money."
"It’s taken a financial crisis to make investors more grounded. There’s been a change in culture and 'get rich quick' is slowly but surely filtering out. This is part of the reason why equity income strategies have done well, but the transition isn’t complete."
Lowcock says equity income suits all kinds of investors with different time horizons – particularly as bonds are offering next to no value at the moment.
"I hold a number of them in my portfolio because at my age, where I have a time horizon of 30 years or so before I retire, they’re good for compounding returns by reinvesting the dividend," he explained.
"They’re also good in the shorter-term, first of all because bonds aren’t a great place to be at the moment, but also because the income dampens the volatility. If you’re looking to live off the income, you can just take the dividend, so they’re good for those in retirement as well," he added.
Co-head of multi-manager at F&C Gary Potter is of a similar opinion. He pointed to Veritas Global Equity Income as an ideal investment for someone approaching retirement.
Although Lowcock says investors should not exclusively invest in equity income funds, as they should be diversified across a number of asset classes, he says that large, reliable funds run by experienced managers can make up the core of the vast majority of portfolios, regardless of age.
He highlights his favourite three choices that give investors exposure to a number of different sectors and markets.
Artemis Income
"The big choice in the UK Equity Income sector is between Adrian Frost and Neil Woodford – I’d personally go for Adrian Frost and Artemis Income," said Lowcock.
"The funds are very similar, but I’ve held the Artemis fund for a long time and it’s always done a good job for me."
"It’s that bit smaller than the Invesco Perpetual Income and High Income funds, which gives him a little bit more flexibility."
Artemis Income has £5.48bn in assets under management (AUM), while Woodford’s two income funds – which are almost identical and part of the same strategy – have combined AUM of £24bn.
Lowcock also points to the fact that the Artemis fund is yielding more than both of Woodford’s, and that Frost is responsible for a smaller number of funds than Woodford, meaning that he can dedicate more of his time to the flagship portfolio.
Artemis Income is currently yielding 4.1 per cent, while the two Invesco funds are yielding around 3.4 per cent.
However, Woodford comes out on top on a total return basis over three, five and 10 years, with less volatility.
Performance of funds vs sector and index
| Name | 1yr (%) | 3yr (%) | 5yr (%) | 10yr (%) |
|---|---|---|---|---|
| Invesco Perp - High Income Inc | 22.78 | 50.54 | 50.55 | 251.1 |
| Invesco Perp - Income Inc | 23 | 49.49 | 49.42 | 210.83 |
| Artemis - Income | 23.62 | 43.34 | 48.31 | 163.82 |
| FTSE All Share | 21.45 | 38.4 | 34.99 | 133.34 |
| IMA UK Equity Income | 23.24 | 41.18 | 37.52 | 119.93 |
Source: FE Analytics
Artemis Income is significantly less concentrated than Invesco Perpetual High Income, which may be a result of Frost’s greater flexibility. He has 32 per cent of his assets invested in his top-10, compared with High Income’s 57 per cent.
Frost is less reliant on the healthcare sector than Woodford and also has a greater proportion in mid caps.
One of his highest-conviction bets at the moment is Rio Tinto, which has had a tough time over the past three years or so, along with the entire mining industry.
Artemis Income is available for a minimum investment of £500 and has an ongoing charges figure (OCF) of 1.54 per cent. Invesco Perpetual High Income is more expensive, with an OCF of 1.69 per cent.
Newton Global Higher Income
While M&G Global Dividend has proven more popular in the sales charts in recent months, Lowcock prefers James Harries’ Newton Global Higher Income fund.
"If you buy in to this fund then you’re buying in to Newton’s thematic approach, which is quite cautious at the moment," said Lowcock.
"They think there’s too much debt in the world and see income and as a good way of protecting investors."
"Harries combines this top-down view with good stockpicking, and the yield he generates is very diversified."
The £4bn Newton Global Higher Income fund has beaten its sector and benchmark since its launch in November 2005. A big portion of this outperformance came from its ability to protect against the downside in 2008.
Performance of fund, sector and index since launch
Source: FE Analytics
The fund has a more modest record over the shorter-term, as its defensive stance has seen it underperform during times of steep market gains.
However, Lowcock says one of the fund’s biggest draws is that it is so steady and predictable, and should protect investors from future falls in the market.
The FE Research team points out that the fund has become even more risk-averse in the aftermath of the crisis.
"Before the 2008 crisis, the portfolio had a greater percentage invested in mining companies, financial companies and emerging markets," the team said.
"It adopted a less risky approach after the losses it experienced that year, which is why the manager now refrains from exposing too much of the portfolio to a single country."
"The new structure means the fund struggles a little in rising markets compared with its peers, but it should beat them in falling ones; this was put to the test in 2011 and seems to have paid off."
The fund’s sector exposure is very diversified, with almost equal weightings to the likes of consumer products, healthcare, industrials, financials and TMT (technology, media and telecoms).
Harries invests predominantly in developed markets, with direct exposure to emerging Asia and South America, at just 13 per cent. The US is Harries’ biggest regional position, though the fund is underweight relative to the benchmark. Europe is his biggest overweight.
Newton Global Higher Income is currently yielding 4.14 per cent, and must always target a level in excess of 25 per cent of the FTSE World index. It requires a minimum investment of £1,000 and has an OCF of 1.64 per cent.
Newton Emerging Income
In a recent FE Trustnet article, Lowcock voiced concerns over investors who hold a number of funds from the same asset manager in their portfolio.
However, due to the strength of Newton in the equity income market, he says holding Newton Emerging Income alongside Newton Global Higher Income is acceptable.
Lowcock also likes Newton Asian Income, but given that this fund has significant exposure to developed markets via Australasia, and Harries’ fund has so little directly invested in emerging markets, he says Newton Emerging Income is the better choice.
"It’s one of the very few emerging market income funds around, and it is run by an established team," he said.
"[Manager] Jason Pidcock is a very passionate manager and has had an excellent run. They get in and meet the companies on the ground, which is good."
Newton Emerging Income is co-managed by Pidcock and Sophia Whitbread. It was only launched in October 2012, but has made a very good start.
Performance of fund vs sector and index since launch
Source: FE Analytics
Geographically, the managers favour Asia Pacific and South America, which have a combined exposure of 70 per cent.
They continue to avoid India, where companies have a poor record of paying dividends, and are also wary of eastern Europe and especially Russia.
South Africa is a significant regional play as well, making up 10 per cent of AUM.
They like defensive sectors such as healthcare, and are also overweight industrials. Infrastructure is a big theme in the portfolio, particularly in Brazil in anticipation of the upcoming Olympics and World Cup.
The fund has an OCF of 1.75 per cent, and is available for a minimum investment of £1,000. It has already grown to £259m, but is much smaller than the Newton Asian Income fund.
