The Scotsman

Tide may be turning for equity income funds

- Comment Bill Jamieson The average UK equity income trust is trailing well behind the tech superstars.

There seems no end to the troubles of equity income funds and trusts in recent years. But is the tide about to turn? They have long been among the most popular choices for private investors, but in recent years have trailed other equity market sectors.

Growth stocks – especially companies in the telecoms and technology sectors – have powered ahead while the more defensive, value-orientated funds and trusts have struggled through lacklustre capital performanc­e.

Take the top trust performers in the technology, media and telecoms sector. Over the five years to last week their shares have bounded ahead by an average of 212 per cent. By contrast, the average UK equity income trust, while it has still performed well with a gain of 93 per cent, is trailing well behind the tech superstars.

Last week it was the turn of Standard Life Equity Income Trust and its well-regarded investment manager, Thomas Moore, to unveil a Janus-like set of annual results. The dividend payment is up by an impressive 9.4 per cent. And the share price total return in the year to end June at 14.2 per cent is well ahead of the FTSE All-share equivalent – 9 per cent.

While the trust has faltered over a threeyear time period, trailing the FTSE All Share total return by around 2.9 percentage points, over five years it has beaten the FTSE All Share total return .

But the outperform­ance is modest here at just 1.25 per cent. Compared with trust performanc­e in other sectors it looks dowdy. In pure capital gain terms – that is, not including dividend income – equity income funds have struggled during a prolonged outperform­ance of ‘growth’ versus ‘value’. Stock selection at SLEIT has not been free of error – holdings in companies such as Galliford Try, Sage and Micro Focus have suffered derating and stockspeci­fic problems.

Neverthele­ss, the dividend has been stepped up. And the appeal of a diversifie­d income trust is, of course, the higher yield on offer and the prospect of regular if unspectacu­lar dividend growth. This holds particular attraction­s in an era of ultra low rates of interest on bank and building society deposit accounts.

For much of the past two years investment advisors have been fretting about a turn in the cycle. Leading markets such as Wall Street have had an unpreceden­ted ten year bull run and look vulnerable to correction. Central banks have been moving to raise interest rates, investors are looking for more defensive investment­s and tech trusts have been looking increasing­ly vulnerable to setback. So what can SLEIT offer? One particular attraction is its relatively high weighting in smaller companies – 31 per cent of the portfolio, and with 35 per cent in the FTSE250 sector, rather than simply hugging the pay-out behemoths of the toppy-looking FTSE100.

At 480p, shares in SLEIT are at a small discount to net asset value and are yielding 4 per cent. The fund itself is just £236 million – small for a trust in this sector and particular­ly for one now in the much- enlarged Aberdeen-standard group. It has no regular savings plan of its own. However, its shares will soon be available on the Aberdeen savings plan platform which should boost their appeal. This is also an excellent way of reinvestin­g dividend income, which can add substantia­lly to overall capital return.

The trust also produces a well-presented brochure, with analysis of performanc­e and commentary on holdings – but it’s cluttered with corporate governance platitudes. More hard facts and figures on the performanc­e of its investment funds would help.

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