Interactive Investor

The fund sector investors have been selling for more than a year

This sector remains out in the cold, despite performance picking up of late.

6th September 2021 10:10

Kyle Caldwell from interactive investor

This sector remains out in the cold, despite performance picking up of late.

Investors are continuing to give UK equity income funds the cold shoulder, despite the recovery in dividends that’s taking place.

The latest figures from the Investment Association (IA) show the funds universe continued to be in high demand in July, with £4.8 billion invested. In the first half of 2021, fund sales hit a four-year high, with total net sales of £24 billion.

However, UK equity income funds remain firmly out of favour. The sector posted its 14th consecutive month of outflows (more money withdrawn that invested), with £46 million leaving the sector in July. The UK Smaller Companies sector also posted a small outflow, of £3.6 million, while funds in the UK All Companies sector were in demand, attracting £295 million.

Global funds was once again the most popular sector, with inflows of £862 million. Mixed Investment 40-85% Shares and Volatility Managed were the second and third most-popular sectors, with sales of £648 million and £510 million.

Investors are more positive on global dividends. For the past three months, the IA’s Global Equity Income sector has received inflows of more than £200 million.

The latest report from the Janus Henderson Global Dividend Index noted that global dividends are expected to return to their pre-pandemic levels within the next 12 months, while UK dividends are expected to take until 2025. A key reason for this is that some of the biggest income-paying companies in the FTSE 100 had been paying more in dividends than they could afford to prior to Covid-19 and have taken the opportunity to re-set their dividends to more sustainable levels.

On a positive note, UK dividend payments beat expectations in the second quarter of this year, with miners and financials fuelling the recovery

Over the past year, UK equity income funds have outperformed global equity income funds, with returns of 32.6% versus 23.8%.

In addition, funds in the IA UK All Companies sector have outperformed funds in the IA Global sector over the same period, with returns of 33.8% against 25.6%.

Despite a pick-up in popularity of late, with the IA UK All Companies sector posting two months of consecutive inflows, year-to-date the sector has posted outflows of £288 million. In contrast, more than £7.5 billion has been invested into the IA Global sector.

Last month, both Nick Train, manager of Lindsell Train UK Equity and Finsbury Growth & Income investment trust (LSE:FGT), and Alex Wright, who manages Fidelity Special Situations and Fidelity Special Values (LSE:FSV), suggested that while the region continues to be unloved among investors, UK companies are attracting plenty of attention from overseas suitors due to their cheap valuations.

Refinitiv data shows takeovers of UK companies hit a 14-year high by value in the first seven months of this year. The total value of deals over this period was $198 billion (£142 billion). This represented a more than threefold increase compared to the same period last year.

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