Standard Life ezine - Keeping the faith in UK equity income – Standard Life Savings & Investment Ezine

Standard Life's Savings & Investment newsletter for advisers

Issue 8: November 2007

Following several years of outstanding returns, UK equity income funds have struggled in 2007. Not least, this is because banking, insurance and general financial stocks, a mainstay of income funds, have had to contend with the fallout from the US sub-prime mortgage crisis and the resultant credit crunch.

However, while equity income funds may not have delivered the capital growth of recent times, they have continued to deliver consistently high yields. For example, the yield on the Standard Life Investments UK Equity High Income Fund aims to be at least 10% above that of the FTSE All-Share Index*. Given current market volatility, a steady income is not something investors can easily ignore.

*The FTSE All-Share Index is calculated solely by FTSE International Limited ("FTSE"). FTSE does not sponsor, endorse or promote this fund. All copyright in the index values and constituent list vests in FTSE. "FTSE ®" is a trade mark jointly owned by the London Stock Exchange Plc and The Financial Times Limited and is used by FTSE under licence. "All-Share" is a trade mark of FTSE.

In addition, we appear to have reached the top of the economic and interest rate cycle. As UK economic growth moderates, capital returns may begin to diminish and the yield available on equity income funds will start to look increasingly attractive. Therefore, now could be the time for investors to top up their exposure to income-producing equities within their portfolios.

Equity income funds are not just a short-term investment play either. While not always offering the exciting growth levels of riskier assets, high yielding stocks aim to deliver strong dividends. By doing so, they are more attractive to investors. Income stocks must therefore perform consistently well over the long term in order to meet dividend payments.

When choosing an equity income fund, investors do not have to ignore growth completely. There are funds available, which can include investment in growth stocks that do not necessarily have an above average yield. By doing so, these equity income funds can enjoy both a high yield and strong growth from the best market performers, therefore offering the best of both worlds.

Whether investing in income or growth companies, picking the right stocks is obviously vital, especially when markets are volatile. Investors should therefore carefully consider each asset manager's approach to stock selection. Standard Life Investments, operate within their ‘Focus on Change’ philosophy. It aims to deliver strong performance for their clients in any economic cycle. ‘Focus on Change’ seeks to identify key factors that drive a company’s market price. Standard Life Investments can then focus on possible future events and whether these will lead to a revised price.

There is little doubt that current market uncertainty has made investors nervous. However, when markets are volatile, this tends to produce some very attractive buying opportunities, and Standard Life Investments aims to take advantage of these throughout the rest of 2007. Despite remaining credit market issues, the majority of blue-chip companies are not having problems raising funds. Therefore, companies on a sure footing and with sound commercial strategies currently represent very good value.

This is particularly true of the traditionally high yielding sectors, where there is still a high level of corporate activity and company directors have demonstrated their faith by continuing to buy into their own stock. Not only have these firms continued to deliver high yields during difficult times, but they are now well placed to produce growth. Therefore, the outlook is very positive for the equity income sector.

Past performance is not a reliable guide to future performance and you may get back less than you invested. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of this content.