Towards the end of November the average income fund started to outperform the average UK All Compani...
Towards the end of November the average income fund started to outperform the average UK All Companies fund over a rolling 12 month period.
It must be said that this out performance has had more to do with negative events in other areas of the market rather than positive developments among traditional income stocks.
With healthy institutional cash positions, investors have simply rotated within the market, but often with little conviction.
Most fund managers remain pro-growth, looking for the opportunity to buy the tech sectors again.
Although few tech stocks offer any yield attractions, the fear of missing the boat again is powerful.
The bull run in technology stocks started rationally enough with the better companies gaining relative support but ended irrationally as investors applied the principle of a rising tide lifts all vessels, good or bad.
The subsequent bear market in this segment of the market has also started rationally with investors becoming progressively more stock specific.
However, we have yet to see the irrational selling of tech, media and telecom stocks that might possibly mark the real bottom and even the better quality companies would find it hard to avoid being sucked down by this frenzy.
However, with business investment budgets being squeezed by lower equity values, stretched balance sheets and forecast lowered earnings, the medium term outlook is becoming more apparent and analysts may start to become more openly pessimistic.
From this should come further contractions in sector ratings and hence greater opportunities for income fund managers.
Traditional income stocks have not enjoyed ratings that afforded them opportunities to become acquisitive. This should be seen as strongly positive. Instead, management has been forced to concentrate on running their companies better. This is in contrast to more highly rated companies who have found it seemingly impossible to avoid going on the acquisition trail. It is hard to avoid the conclusion that many of these deals were done to acquire lower rated earnings as organic opportunities diminished.
Even in the absence of an obvious bottom in the growth sectors of the market, income fund managers should continue to do reasonably well.
Although many income stocks will struggle to match the earnings growth of the market as a whole, their ratings had fallen to levels that assumed recessionary conditions. Accordingly many income stocks that have risen strongly in recent weeks still sit on undemanding ratings.
Tim Rees is director of UK Equities at Clerical Medical
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