Income and growth

How to blend income and growth funds within a portfolio is one of the key decisions for every intermediary.

Equity income funds provide investors with a steady stream of income via dividends while growth funds offer clients an increased chance for capital growth.
Over the past five years, income funds have outperformed their more racy counterparts.

The average UK Equity Income fund is up 62.5% over the five years to March 13, compared to the average All Companies fund rise of 53.5%.
As a result, value managers such as Invesco Perpetual’s Neil Woodford and Jupiter’s Tony Nutt have enjoyed huge inflows into their funds.

Premier sales director Simon Weldon said one advantage of income funds is that they tend to invest in larger companies giving investors added protection during market volatility.

“There is a well-proven flight to quality when you get difficulty in the markets. This is one big reason to have income funds as part of any client’s portfolio.”

He pointed to the reputation of Neil Woodford which suffered during the dot.com boom of the late 1990s.

“Markets definitely move in cycles. Growth stocks came to the fore during the blind euphoria of the late 1990s and early 21st century. Woodford was one who lagged far behind the market but his investment approach has proven successful over the long term.”

Weldon said the age of the investor would have a large influence on how much growth fund exposure in a portfolio.

“A typical investor would likely have a large chunk of money in equity income. However, a client with 25 years to invest could bear a higher degree of risk and have more growth exposure.”

Justin Modray, of BestInvest, believes that it is almost impossible to call the market and pre-empt a move from a value to growth cycle, so recommends including both funds in a portfolio.

“Over the past five years, value managers have performed better but we could move into a growth phase at any time,” he said. “It is too difficult to call what is best going forward so a portfolio that has good managers on both sides should do well in the long term.”

Modray said styles vary between managers with some income managers such as Axa Framlington’s George Luckraft using a barbell approach, combining income-generating stocks with pure growth plays for capital appreciation. Invesco’s Neil Woodford, on the other hand, manages a more defensive portfolio, with around half of his £7.5bn High Income fund comprising of tobacco and utility holdings.

“At the same time you have growth managers who adopt a value approach similar to their income-generating counterparts,” Modray said.

Julian Sutton, manager at Schroders’ multi-manager team, said value stocks performs best in the early parts of the economic cycle after a recession.

“It is not until the mid-part of the cycle that investors start to look for companies that can grow even when there’s no growth in the economy itself,” he said.
“We have now finished the recovery stage of the cycle and I expect to see growth start to take the lead as the economy slows down.”

1 April