The UK Equity income sector has been a tough place over the last five years. Is there any hope ahead for beleaguered investors?
- The average fund is up just 3.9% over five years, compared to 104.8% for the average North American fund
- AJ Bell’s latest Dividend Dashboard report showed dividend payments for FTSE 100 companies are likely to fall 24% in 2020
- UK companies had the lowest 12 month forward earnings estimates of any major economy
No investor will need to be reminded of how dismal an investment UK equity income funds have proved over the last five years. But we’re going to do it anyway. The average fund is up just 3.9%, a result that leaves them trailing inflation and, if they’ve taken income, nursing capital losses.
Perhaps more galling is the opportunity cost. Instead of languishing in their UK equity income fund, investors could have been in a North American fund, average gain 104.8%, or just a plain old global fund, average gain 81%. Even the average European manager managed to deliver 53.1%.
At the same time, while the UK Equity income sector has had its share of bad apples – undoubtedly the weakness of the Woodford portfolios has weighed on sector returns – almost no manager has managed to transcend the sector’s weakness, no matter how good their stock picking. Liontrust’s Robin Geffen has given it a go, delivering 27.8% over the five year period. The ASI UK Equity Income fund and Trojan Income fund are also worthy of note. Overall, however, it’s been a tough sector in which to deliver returns.
There appears to be no immediate reprieve for the sector either. AJ Bell’s latest Dividend Dashboard report showed dividend payments for FTSE 100 companies are likely to fall 24% - or £18 billion - in 2020, the lowest level since 2012.
Recent data from JP Morgan Asset Management showed UK companies had the lowest 12 month forward earnings estimates of any major economy. The UK is likely to emerge from its pandemic experience with little credibility and a lot of debt. Brexit still looms and while some are arguing that any kind of certainty, deal or no deal, would be good news for UK assets, that is by no means assured. With this in mind, it is difficult to see any immediate catalyst for a change in fortunes for the UK.
There is a longer-term problem, which is the make-up of the FTSE 100. It is concentrated in areas of low growth or structural decline. Even if it does look like a bargain today, why would investors want to commit long-term capital to low growth areas?
This paints a gloomy picture, but it is usually when the last bull has left the room that the market starts to turn. Stock markets can and do reshape themselves and the FTSE 100 is no exception. It’s undoubtedly cheap, but whether it’s a bargain is open to question.