Plenty of investors have been turning to the IA UK Equity Income sector over the past year as they’ve tried to combat the cost of living crisis. It’s easy to understand their enthusiasm. Funds in this sector offer what many most desire: a regular income and the prospect of some longer-term capital growth.
But what do you need to know about equity income investing? Here we look at this intriguing area and suggest portfolios that are worth considering.
Investing for income
So, what is investing for income? Well, it means having all – or part – of your portfolio invested in such a way that it generates a stream of income, either to supplement your normal income, or to reinvest. This can be in the form of interest payments from savings accounts or bonds, as well as dividends paid out by companies from their profits. You can also put your money into an equity income fund, which blends a range of dividend-paying companies in a single portfolio. This diversifies risk, with the portfolio manager investing in a wider selection of companies.
Why invest for income?
There are plenty of reasons to invest for income. For example, you might need an extra source of revenue to help pay monthly bills. This is particularly relevant given the soaring inflation households have endured over the past year, with the price of goods and services rocketing. Alternatively, you may be looking for some more money to pay for next year’s holiday or to help fund your child’s university education.
Investing v savings accounts
The Bank of England has spent much of the past year hiking interest rates to combat inflation. This has been good news for savers as their money is earning more in bank interest. Unfortunately, these increases haven’t kept pace with rising prices, meaning savers are seeing the purchasing power of their savings drop. Most savings accounts are paying less interest than the rate of inflation, which currently stands at 6.3%, according to the Consumer Prices Index measure*.
Where to invest
This brings us neatly to the IA UK Equity Income sector. Most funds in this area aim to generate a rising income, as well as increasing the value of your initial investment. The income can be paid out to you or reinvested back into the fund which should help enhance the future growth potential of your holding. However, funds in this area won’t all be the same. In fact, the ways in which they are managed may vary enormously, which is why you need to do your research.
Here are five portfolios that are worth considering:
Our first contender is a flexible, high-conviction portfolio that’s run by the experienced team of Adrian Frost, Nick Shenton and Andy Marsh. This fund is designed to provide a sustainable and durable income by investing in a diversified mix of cashflows from different companies. We like this fund’s excellent team, strong process and long-term track record, as well as the fact it’s been a stalwart of the UK equity income sector for two decades.
In the fund’s most recent update, the managers noted that “indiscriminate, price-insensitive selling” continues to be seen in the UK. “As a result, valuations across the UK stock market remain depressed, at a discount both to its own history and relative to other international markets” **.
We believe this fund is a solid, core equity portfolio and like the fact it’s run by an extremely experienced and long-standing manager in Carl Stick. He has been at the helm for more than 20 years and benefits from an unconstrained approach in terms of sector weightings and portfolio positioning. The fund, which usually consists of 40 to 50 holdings, aims to deliver an annual income that’s at least in line with that of the FTSE All-Share index, over any rolling three year period.
In his most recent commentary, Carl emphasised that the fund’s positioning reflected his caution at a time when people are assuming a recession is on its way. “Fingers crossed that the UK consumer gets through all this, so we have been warming up a few specific retail names,” he wrote. “Cut-price retailer B&M is our favoured play now and we’re hoping that our housebuilders continue to improve in 2024.**”
IFSL Marlborough Multi Cap Income
Our third suggestion is a portfolio that ventures into the small cap space, which is an area that’s often ignored by income funds. Its manager, Siddarth Chand Lall, has run this fund since its launch 12 years ago. His aim is to deliver a greater income than the FTSE All-Share index over any three year period.
His portfolio is primarily constructed on a bottom-up, stock-picking basis, although top down factors will influence its overall positioning. There’s also a mix of company sizes.
According to its recent factsheet, 38% of assets are in mid cap stocks, with almost 30% in small cap names***. Micro-caps are next with 18%, followed by 5% in large caps and 4% in mega caps***. The largest individual holding, meanwhile, is the 4% in Chesnara***, an established life and pensions consolidator in the UK and Europe. Other positions include Bloomsbury Publishing***, the fiction and non-fiction publisher, whose books have included JK Rowling’s Harry Potter series.
Investment Trust approaches
Our next two suggestions are both investment trusts. These products can smooth the income they pay out by holding back income generated in good years to pay out another time. They’re also known as ‘closed-ended’ because there will only ever be a set number of shares available to buy, irrespective of the demand.
First up is the City of London Investment Trust, managed by Job Curtis, which aims to provide long-term growth in income and capital. This is one of the longest-running trusts in the UK, having been launched in 1891. It predominantly invests in larger UK companies with international exposure.
Oil majors BP and Shell, HSBC bank, British American Tobacco, consumer goods giant Unilever and BAE Systems, the defence business, are among its most prominent holdings****. Maintaining dividend income is crucial to its board. This makes the trust an excellent core option for investors wanting UK equity income exposure.
Our second suggestion is the Murray Income Trust, which also aims to provide a high and growing income, combined with capital growth. It invests in 30 to 70 UK companies. Currently, this list includes RELX, the information and analytics business, Anglo American, and the London Stock exchange****.
The focus of the trust is on building a portfolio of high quality companies that can deliver a resilient income, as well as strong capital growth prospects. We see this as a dependable, diversified and differentiated trust, which has delivered a consistently strong performance at a challenging time for UK equities.
*Source: Gov.uk, October 2023
**Source: fund commentary, September 2023
***Source: fund factsheet, October 2023
****Source: fund factsheet, 30 September 2023