PA ANALYSIS: Is the UK equity income love affair over?

Added 7th August 2017

With assets under management totalling £63.5bn, the IA UK Equity Income sector has long been a favourite of investors hunting yield in a low interest rate environment.

PA ANALYSIS: Is the UK equity income love affair over?

However, approaching the 10th anniversary of the start of the global financial crisis, recent sales statistics show that investors may be falling out of the love with the sector.

After the Investment Association (IA) reported what could be seen as trickle of outflows in May to the tune £23m, the sector experienced somewhat more of a flood of redemptions in June when some £429m of investor money was pulled from the peer group.

This made it the second most unpopular sector behind UK All Companies, which saw outflows of £486m, as investors turned their back on UK equities in general. Indeed the third most worst selling sector in June was UK Smaller Companies which saw negative net retail sales of £186m.

So are the outflows from the traditional dividend favourite a short-term blip related to Brexit concerns and UK political uncertainty, or is something more profound steering investors away from the UK when it comes to the hunt for yields?

Ryan Hughes, head of fund selection at AJ Bell Investments, says the pressure placed on UK equities as investors continue to digest the impact of Brexit has been the catalyst for investors to finally contemplate the issue of ‘home bias’ in their portfolios.

“The vast majority of investors are hugely overinvested in UK equities and with an uncertain outlook, this has focused the attention elsewhere,” Hughes says.

“For UK equity income funds, they have had a tough 18 months from a performance perspective with the average fund underperforming the FTSE All-Share by 8%.

"With exposure typically seen in certain sectors such as oil, pharmaceuticals and life assurance, it is unsurprising that these funds have struggled and investors may well be deciding these types of stocks will continue to struggle going forwards.”

Indeed Adrian Lowcock, investment director at Architas, says the sector could well suffer further outflows as dividend stalwarts such as AstraZeneca and British American Tobacco have suffered large falls in recent weeks.

“The sector has had a tough few years and lagged the wider market over the past two years,” says Lowcock. “The collapse in the oil price weighed on large dividend players such as BP and Shell and the wider commodities slump highlighted the lack of dividend cover for many of the UK’s largest companies.”

The rotation out of defensive stocks and the so-called bond-proxies into value companies following the Trump rally, has also weighed on the traditional income stocks held by UK equity income managers adds Lowcock.

“Value stocks have the potential to pay a dividend and some may already do so, but often there have been concerns over future outlook for the company either at sector level or individually,” he says.

Meanwhile Lowcock argues that factors such as spiking inflation on the back of the fall in sterling and a slowing down in the UK economy, has reinforced investor concerns regarding the impact of Brexit and the future potential of UK companies.

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Adam Lewis

News Editor

Adam has been a freelance journalist and content editor since 2015. A journalist and editor with over 15 years experience, until 2015 he worked as editor of Fund Strategy for three years, and worked on the same title as deputy editor there seven years. Prior to this he was reporter at Investment Week.

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