The price of dividend-paying stocks has spiked as investors look for bond proxies, given the low-yielding fixed income market.
As a result, a number of fund managers have claimed that defensive income-producing equities are now expensive compared with historic levels.
However Lofthouse and Jones, who manage the Henderson Global Equity Income fund, say that these expensive stocks could well increase further in value if economic growth sets in, as equity markets are boosted by inflows.
They admit that the relative valuation of defensives compared with cyclical stocks would almost certainly drop, but that does not mean the prices of defensive equities would necessarily fall in real terms.
"We haven’t seen a period of decent economic growth for a while," Lofthouse (pictured) said.
"I think it is forgotten that US long bond yields troughed last June, they haven’t just suddenly shifted. US growth is now coming through and Europe is looking slightly less worrying." "I just think people are forgetting what it is like when there is economic growth. If QE (quantitative easing) does work and delivers growth, and that growth is sustainable without stimulus, then there will be more flows into equities. That will be really interesting," he said.
"It could mean that the current market is not expensive, it may just mean high relative valuations may drop," Lofthouse added.
Jones says that there are signs that investors are becoming more comfortable with the state of the market.
"We are already seeing that US cyclicals are gradually being re-rated. They could move from a P/E range of 10 to 14x to a range of 14 to 18x," Jones said.
Lofthouse added: "People forget that the most recent period of risk-on/risk-off has been driven by policy. However, if the economy is not driven by policy and is instead driven by growth, then there will be more money in the tank."
Lofthouse and Jones’£664.2m fund was launched in its current form in June 2012.
According to FE Analytics, the four crown-rated fund has been a top-quartile performer in the IMA Global Equity Income sector over this time, with returns of 36.19 per cent, beating its MSCI World index benchmark in the process.
Performance of fund vs sector and index since June 2012
Source: FE Analytics
However, it has been more volatile than both the sector and index over this time.
The fund has a yield of 3.7 per cent, which the duo get from a globally diverse portfolio of 75 holdings. They have 35.14 per cent in Europe and 31.06 per cent in the US.
Japan, Asia Pacific and the emerging markets are also represented in the fund’s assets.
Their largest sector weightings are to telecoms, media and technology companies and pharmaceutical stocks. The fund also has decent exposure to more cyclical areas such as banks and oil and gas companies.
Lofthouse and Jones describe their style as primarily focusing on dividend growth and good valuations.
Despite that approach, they say even the most expensive of defensive stocks are not grossly overvalued.
"It [valuation] is reflected in our portfolio, we don’t hold many utilities because they are slightly expensive. However, these are by no mean dotcom levels by any stretch of the imagination, they are nowhere near 50x, for instance," Lofthouse said.
"It is just that those valuations are a little higher than they have been."
Jones (pictured) added: "These aren’t scary levels, it has been a lot worse in the past."
"Looking at the US market now, utilities have a P/E of around 16x. They may look expensive relative to the market, but they are offering a yield of 3.9 per cent. The reasons for these valuations are because these are fine but dull stocks." "Are you getting paid a good yield? Yes. Are they a little more expensive? Yes."
"We don’t see interest rates rocketing up anytime soon, the absolute risk has been overplayed a little bit," he added.
Lofthouse is positive about the fund’s strategy and believes it is a good environment for equity income investing.
"If you look at it, we are in an environment where interest rates are low and people are struggling to find income: there are very low yields from the bond market."
"Dividend yields may have compressed, but relative to history they haven’t compressed much."
"Against that backdrop, a diversified global equity income product is an attractive proposition," he added.
Henderson Global Equity Income requires a minimum investment of £1,000 and has an ongoing charges figure (OCF) of 1.79 per cent.
