Q&A: Ashby's beginners' guide to equity income

Well-publicised problems facing the banking sector and BP have deprived UK equity income managers of some traditional big dividend payers.

Despite this the sector has a proud long-term track record and Graham Ashby, head of UK equities at LV Asset Management, suggests it is an investment style which will reward investors in the future

Q. What exactly is UK equity income?
A. UK equity income funds are equity funds that invest in companies that traditionally offer a decent dividend yield but also dividend growth.

Q. And is this a product for all environments?
A. It really is. If you look over the longer term equity income funds have done better than those in the All Companies sector because they capture those positive attributes which are decent yield and dividend growth, and the reason why they tend to outperform is because those are the key drivers of long-term wealth creation.

Because despite what you read in the newspapers, actually, share prices broadly just move up with inflation. If you want to get real returns, ie above inflation, it is the income and the reinvestment of that income that is a key driver.

Q. In what conditions does UK equity income tend to do well or less well?
A. It tends to do well during periods of sustainable dividend growth, which really is what happens over most of the time in the marketplace. The times when it tends to do badly are key inflection points or where there are bubbles in the market.

So, for example, in early 2009 when there was a shift in sentiment towards the so-called ‘dash to trash’ the equity income funds did not do quite as well as some other parts of the market, and also they did not do quite so well during the the TMT bubble and the commodity bubble, but over the longer term they have performed extremely well.

Q. So they are sort of slow and steady performers?
A. They tend to be less sexy than say growth funds, but I think actually it is a core investment that many investors look for.

Q. So this is a core investment holding for many people?
A. It certainly is. It really offers something for most investors. For younger investors, they can reinvest the income to build up their pension pot, if you like, and for older investors of course it can actually be used as an income source, and with interest rates being very low at the moment actually the yield you can get on a lot of equity income funds is very attractive versus corporate bonds and, attractive versus cash, so it is very much something that can be used by many investors.

Q. Why limit yourself to UK equity income?
A. The UK is very concentrated in where it gets its income from, and actually it is quite a concentrated market in the sense there are some very large companies. However, it should be noted that where the average UK company gets its revenues and its profits, from is very diversified, so about 60% of profits of the typical UK company come from overseas.

In many respects when you invest in the UK market you actually get exposure to companies globally. In many respects going overseas does not really resolve anything. The other beauty of the UK is we have a very strong dividend culture here. Most UK companies recognise the importance of dividends, and many overseas markets do not have that culture.

So maybe when the going gets tough the companies themselves tend to cut dividends without view to the long-term demands of shareholders.