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Investment Matters: Income Benefits

Investment Matters: Income Benefits

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The worth of dividends never seems to be appreciated quite as much as when markets are falling but in periods of rapid growth, they are quickly discounted. After the recent strong run in growth stocks, a reminder of the attributes of equity income is sometimes useful for investors. By and large, the UK investor is swayed by the press and the more recent headline-grabbing 40-50 per cent-plus rises in the market has caught the attention of many.

Just like the big increases in markets such as China and Russia caught the attention of growth investors in recent years, it is hard for the average person not to get influenced by the appearance of such stunning returns.

As the equity rally has continued, retail investors appear more interested in growth than income. IMA stats show that pound 90m of net retail sales were in the all companies sector in August while pound 25m came out of the equity income sector.

In the same month, pound 68m-worth of net retail sales were in the new income & growth sector. If you look at institutional investors – they were doing the exact opposite with pound 118m coming out of the all companies sector and pound 28m in net sales were in equity income and a further pound 98m in income & growth funds.

Despite all these persuasive arguments about the attributes of income investing, it continues to be growth funds that remain the most popular. Although there has been a surge in equity income sales in the past few years, the sheer number of funds in this space has remained remarkably static for years, whereas the number of UK all companies funds has grown steadily, with more than 100 launched in the past five years alone. According to Trustnet data, there are 153 funds in the UK all companies sector with a 10-year track record and 233 have been around for five years. Today, there are 327 funds in the sector.

Of the 85 funds in the UK equity income sector (plus the 18 in the new income & growth sector), 58 have a 10-year track record and 74 have been around for five years.

While launches in the UK equity income space have been taking a back seat more recently to the trend towards foreign income funds, the sector has recently added a new constituent. Evenload income, run by former Rathbones manager Hugh Yarrow, aims to invest in a concentrated portfolio of undervalued, income-generating stocks. Yarrow says the initial yield forecast for the fund is 4.3 per cent and it will contain a maximum of just 30 stocks. Yarrow, who is supported on the fund by analyst Ben Peters, said the typical holding period for stocks will be three to four years, giving the fund a low annual turnover of around 30 per cent.