The likes of Lloyds and AstraZeneca are amongst the ‘bargain’ stocks most bought by fund managers in the IA UK Equity Income sector over the past six months, according to research by FE Trustnet.
This period spans the FTSE 100 hitting an all-time high of 7,104 points at the end of April and today, where the market is significantly down and still reeling from a hazardous August crash.
Unfortunately for investors, the UK equity market has been falling for most of this period with only piecemeal signs that a sustainable recovery is underway.
Many have suggested the broadly risk-off tone from global markets, which stems from concern that Chinese economic growth is slowing down and the timing of interest rate rises, is irrational and is therefore a good buying opportunity.
This is particularly the case in the FTSE 100 as this index has borne the brunt of the selling. The FTSE 250 and the FTSE Small Cap indices by comparison are only marginally down.
Performance of indices since 27 April 2015
Source: FE Analytics
Our data shows Lloyds is the most bought stock in the past six months by managers in the IA UK Equity Income sector. This may be for several reasons.
Firstly, it started paying a dividend earlier in the year for the first time since its bailout in the financial crisis, albeit at a low yield of 1 per cent.
Also, its sale by its largest holder – the UK government – is underway with a complete transfer to private ownership expected next year.
The stock has made plenty of headway in the past few years but it is still hugely down from its pre-financial crisis level.
Performance of stock and index over 8yrs
Source: FE Analytics
However, it has been falling harder than the market in past six months or so mostly due to the announcement of the government sale.
Helah Miah, investment research analyst at The Share Centre, recently said Lloyds is looking attractive on a long-term basis while Jupiter UK Growth manager Steve Davies thinks the share price could soar to 120p over next two years.
He says this is due to a likely end to payment protection insurance (PPI) claims and no further fines from banking regulators, which would allow it to substantially increase its dividends. He says this rise would lock in an 8 per cent yield for those investing today.
In contrast to one of the most sold stocks over the past six months, GlaxoSmithKline, the second most bought is its mega-cap pharmaceutical counterpart AstraZeneca.
Its stock has fallen by nearly 20 per cent since April on concerns it may have delays in its pipeline, putting its dividend at risk.
Aviva was the third most bought stock. Income investors have favoured non-bank financials for some time and the number holding Aviva may have been bolstered by its acquisition of Friends Life in April/May, as many holding of that stock may have converted to Aviva.
Imperial Tobacco comes next on the list. It has long been a favourite with some of the UK equity income’s most respected names such as Neil Woodford and Mark Barnett, who both have a large overweight here.
It has done well in the market correction, rising almost 20 per cent since April, and anyone buying on Black Monday would have bought a swift dip, with the firm pledging to pay out a 10 per cent higher dividend for this year.
Performance of stock and index in 2015
Source: FE Analytics
Last up is housebuilder Berkley Group, one of the best performing stocks of the past few years. However it is a recent addition to the FTSE 100, having been added last month.
According to FE Analytics, it is up nearly 150 per cent over the past three years after being swept up in huge bull run for house builders.
Performance of stock and index over 3yrs
Source: FE Analytics
The group announced strong full-year results in June, with profits up 42 per cent to £540m, beating many analysts’ expectations.
It has also said it will look to increase pay outs, which explains its take up by equity income funds having more traditionally been seen as a growth stock.
One equity income manager with a long-term bias to blue chips but who is bullish on Berkeley is Job Curtis, manager of the City of London IT. He thinks housebuilders are increasingly one of the best areas of the market for income investors.
However, he also warned that they carry more capital risk and at some point will fall hard.
“I have seen several bull markets and several bear markets for housing and you cannot forget that is a cyclical sector and there will be a moment to sell it, there is no question about that,” he said.
“However, this is the best bull market I have ever seen because of the companies I own are returning some of their profits in special dividends back to shareholders.”