Performance of UK sectors over 1-yr
Source: Financial Express Analytics
By and large, the top performing funds in the UK All Companies sector were those with small cap exposure. They were also those that had been hit hard in 2008. Of the top 10 funds
year-to-date, all had lost significantly more than the sector average of 32 per cent last year, and four had lost more than 50 per cent.
Although the equity income sector dropped less in 2008 at 29.2 per cent, its exposure to financials meant that it wasn’t as defensive as might be expected. This year, the market’s preference for cyclical, low-yielding companies, such as mining stocks, has meant that the sector has lagged, rising an average of 22.2 per cent, compared to a return from the UK All Companies sector of 29.2 per cent. The Equity Income and Growth sector did prove more defensive in 2008, but has trailed behind both sectors this year, delivering just 18.8 per cent.
Received wisdom is that the market has had its rally and gains from here will be harder won. Legal & General Investment Management equity strategist Georgina Taylor says: "In order to achieve significant upside from here, market participants will need to see evidence that economic growth can be sustained."
That said, there are certain areas of the UK market that look neglected. David Jane, head of equity investment at M&G, says: "The market has completely ignored defensive companies. We believe it will start to favour those companies with a very predictable earnings stream. These strong undervalued defensives don’t need a strong economy to deliver their earnings. The next phase will be about good quality companies."
Ben Russon, manager of the Newton UK Opportunities Fund, agrees that this it is the higher quality, higher dividend companies that are likely to do well: "We are trying to find those companies that are not dependent on economic conditions or have some element of 'self-help'. Also, we are looking for companies with non-UK earnings – the prospects in emerging markets are brighter than in the Western world."
This is likely to be a good time for dividends. Having fallen 20 per cent last year, Taylor says that the current dividend yield on the FTSE 100 (3.5 per cent) now looks more secure. Dividend cuts are likely to be smaller from here and Taylor believes there is an investment opportunity in looking at higher yield stocks.
Looking forward, a focus on quality companies with stronger dividend yields and international earnings would suggest a better environment for equity income and particularly the equity income and growth sector, which to date has proved more defensive. As the recovery has so far proved anaemic, earnings on cyclical companies may disappoint, the market will need to see predictable, all-weather earnings for share prices to move up.