AJ Bell: UK equity income funds trump global and tech peers since cost-of-living crisis | Portfolio Adviser

By Amelia Lane

UK equity income funds have outperformed their global and technology peers during the three years since the beginning of the cost-of-living crisis, according to research from AJ Bell, although Indian equity, US and commodity funds found themselves at the top of the pack.

While IA Global and IA technology & Technology Innovation funds have achieved double-digit returns over three years in nominal terms, at 13.5% and 10.8% respectively, they have still lost investors money in real terms, at 5.6% and 7.8%.

UK equity income funds have achieved an average gain of 16% over the period. Despite this relative success, it has still not quite been enough to see a positive return in real terms, having fallen by 3.5%.  

Top of the performance chart for nominal and real returns over the last three years are Indian equity funds, with the IA Indian/Indian Subcontinent sector having returned 46.7%. In real terms, this amounts to 22.1% in total return terms.

Other sectors to have achieved positive total returns in real terms since the start of the cost-of-living crisis are IA North America, IA Commodity/Natural Resources and IA Global Equity Income, at a respective 3.5%, 3.2% and 0.5%.

Laith Khalaf, head of investment analysis at AJ Bell, said the “surprising” fact that UK equity income funds outperformed their global and tech counterparts could be because of their exposure to energy stocks, as these produce a significant proportion of UK dividends.

“This exposure has afforded some protection to investors during the inflationary crisis,” he said. “Indeed, the UK Equity Income sector has outperformed the broader UK All Companies sector by 10 percentage points over the last three years (the latter has returned 5.6% compared to 16.0% from the UK Equity Income sector). UK Equity Income funds tend to have a larger cap focus than UK All Companies funds, which prefer to go hunting in mid and small caps – areas which have performed well over the long term, but not the last three years.”

A large chunk of UK dividends emanate from the energy and banking sectors, and this exposure has afforded some protection to investors during the inflationary crisis.

It also means the UK has kept up with the global stockmarket over the last three years, exhibiting a 4.7% return in 2022.

“Both the global and domestic stockmarket have managed to stay ahead of inflation over the last three years, which given soaring price rises is no mean feat,” Khalaf said. “The FTSE 100 in particular has stood up well, and its performance is in line with the global stockmarket.

“That’s partly because the FTSE 100 contains a large dollop of oil and gas companies, which have benefitted from higher energy prices. On top of this, banks have seen their net interest margins rise as base rate has climbed. The FTSE 100 also has more ‘jam today’ stocks which prospered in the market rotation that took place when inflation started its ascent, eroding the value of more distant cashflows and the appeal of ‘jam tomorrow’ companies.”