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June 2014 - Equity income

Neil Woodford, one of the UK's most high profile and highly-rated equity income managers, shocked the investment industry earlier this year by announcing that, after 25 years with Invesco Perpetual, he would be leaving the company and setting up on his own.

What followed was months of media attention on Neil, his new company and equity income funds in general. It culminated with the launch of his new fund, on 20th June 2014, Woodford UK Equity Income. It was the most successful launch of a retail fund ever in the UK, raising £1.6 billion in its initial offer period.

But why all the fuss?

Equity income funds have been very popular amongst investors for many years and form the core of many investment portfolios. They are popular because they are one of the few types of fund that attract both investors seeking capital growth and investors seeking an income.

They appeal to income investors because they focus on companies which share of their profits, in the form of a dividend, to their shareholders, and in doing so, produce an income for investors. This has been particularly attractive in recent years as interest rates have been so low on cash accounts and bond funds, another favourite for income investors, have seen their own levels of income decline lower and lower.

They appeal to investors seeking capital growth as the dividends, instead of being taken as an income, can be reinvested back into the fund, buying you more shares and helping to grow your capital. Over time, even very small amounts of dividends reinvested can make a significant difference to the total value of your investment.

Take Neil's old fund, Invesco Perpetual High Income, for example. Over the 25+ years he ran the fund, it would have turned £1,000 invested into almost £8,900 and would have given you a total income of around £4,000. If you had reinvested the dividends, instead of taking the income, your pot of money would have been worth more than £25,000*.

Hence the power of reinvesting dividends and what all the fuss was about.

There are a lot of funds under the banner of 'equity income', with different investment processes. Some aim to produce a very high level of income (or yield as it is known) and some focus more on growing capital. It is therefore important that investors look closely at a fund, to make sure it ticks all their personal boxes, before investing.

Elite Rated funds in the UK Equity Income sector are:

Artemis Income
Evenlode Income
Fidelity Enhanced Income
JOHCM UK Equity Income
Liontrust Macro Equity Income
Marlborough Multi Cap Income
Rathbone Income
Royal London UK Equity Income
Schroder Income
Standard Life Investments UK Equity Income Unconstrained
Threadneedle UK Equity Income
Woodford Equity Income

*source: FE Analytics, 6th February 1988 to 5th March 2014


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Clive Hale, Director - June 2014

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