The past 12 months have seen a dramatic rotation between the low and high yield indices in the UK eq...
The past 12 months have seen a dramatic rotation between the low and high yield indices in the UK equity market. Equity income funds are typically biased towards the value end of the market and more importantly have very low exposure to technology issues.
As such, their fortunes have fluctuated with gyrations of the in such styles. Investing with a growth bias thrived between September 1999 and March 2000, whilst Income Funds were relatively pedestrian.
The converse has been true between March 2000 and October 2000 with value based Income funds enjoying a long overdue period of prosperity such that the average UK equity income fund has outperformed the FTSE All-Share Index by more than 4.5% so far in 2000.
It has to be emphasised that the fluctuations between low and high yield have been exceptional. Now, however, performance of the two indices in the past year come back together again and we appear to be enjoying a balanced, if flat market. We do not believe the extremes experienced are repeatable. That is not to say they will not part company again, but it is unlikely to be to the same extent.
Global interest rates appear to be close to their peaks and earnings have slowed down. The technology sector has been disappointing on a stock by stock basis and this looks set to hamper the progress of the boarder FTSE All-Share Index. Media is certainly preferred in the technology, media and telecommunications arena with an expectation of consolidations to come.
Software companies, on the other hand, continue to demonstrate high ratings and earnings risk. Defensives, such as pharmaceuticals and food retailers, have been seen as a port in the storm but these are now looking overbought. Our safe havens are utilities and financials. However, there have been selective opportunities of late in cyclicals, such as engineers and oils.
In the recent past, income funds with a greater exposure to growth than the majority of the peer group have been strong total return performers in the low inflation, low growth environment wherein we find ourselves. The lower income levels attained from growth stocks have been offset by a proportion of the portfolio invested in high yielding securities with strong recovery prospects.
At times such as these, growth orientated income funds should be seeking special situations and new ideas that will carry funds through a difficult period.
Tech exposure shall need to be limited to a neutral position. Technology companies with solid earnings and unique proprietary technology are preferred but a diversification of stock specific risk is essential.
Now, more than ever, growth at a reasonable price stocks is the key stock selection attribute, with current examples including Aegis and Marconi.
Scott McKenzie is the fund manager of the Norwich Union UK Equity Income Fund
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