Equity income has long been one of our favorite sectors and today we feel it looks more attractive than ever.
Equity income funds have been a firm favorite at Hargreaves Lansdown for almost 30 years and today we think they are more attractive than ever. The principle of equity income investing is simplicity itself — buys low and sell high. Most managers try to achieve this by seeking fundamentally sound companies which look undervalued compared to their peers and offer a good yield. They then wait for them to appreciate in value, which has the effect of making the yield lower, take profits and look for the next opportunity.
The last couple of years have been difficult for stock markets, and this was in part because company earnings fell, caused by the recession. Yet evidence shows that company earnings per share, which fell to a 100 year low in 2009, are steadily improving. This has started to drive up share prices, but many valuations remain attractive and we believe there is still further to go.
Of course there are still significant headwinds for the UK recovery as you can read on http://www.ctrustnetwork.com/c475p1/business-and-investment/forex/forex-brokers.html . However, companies which provide an essential service, for example electricity generation, food producers or medicine, while not entirely immune should be relatively resilient to any setbacks. These companies’ share prices have been somewhat left behind in the rally we’ve seen since March but we believe it’s only a matter of time before they catch up with the rest of the market.
One manager who has recently been increasing his exposure to companies with defensive characteristics is Clive Beagles, who runs the JO Hambro UK Equity Income Fund. The cornerstone of his approach is to identify opportunities he feels others have overlooked, even if it means going against the herd. For example earlier this year Clive Beagles’s stock picking led him to invest in deeply unpopular areas like property. Whilst the situation in property isn’t good, some share prices had fallen so far they just didn’t reflect their value, so he bought ING Real Estate which has performed extremely well since.
He is now taking profits and has shifted his focus selectively towards companies like BP, which have resilient earnings. BP is implementing cost-cutting measures improving its cash position and is on track to pay its dividend, equivalent to a yield of 6.2%.
Last year reminded us that companies can cut their dividends, or not pay one at all. Looking ahead though we believe there is an abundance of opportunities for equity income managers.
Many companies in the UK have surpassed investors’ expectations this year and Clive Beagles is confident he can grow the fund’s dividend (currently 4.6%, variable and not guaranteed) in 2010.
JO Hambro plans to cap this fund when it reaches £750 million to keep it manageable. It still has some way to go, but the fund has recently reached a significant milestone passing its five year anniversary, returning an impressive 45.9% compared to the sector average of 22.8%, but please remember past performance is not a guide to future returns. Whilst it does carry a performance fee, which we don’t like, sometimes it is worth paying a premium for quality, and this fund is attracting an increasing amount of attention. We therefore believe those considering investing should act before the fund is dosed.