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Weekly Manager Views

3 May 2019

At GAM Investments’ Weekly Investment Meeting held on 1 May 2019 the speaker was Adrian Gosden who outlined his latest views on the UK Equity Income market.

UK Equity Income

Adrian Gosden

  • The UK Equity Income sector represents around GBP 80 billion of total AUM. The assets in the sector are far from evenly distributed, with the majority in the largest five vehicles, and we believe there is the potential for this to change going forward.
  • The UK equity market remains unpopular to many investors given the non-resolution of Brexit still hanging over it. However, we feel once there is an outcome, and some clarity emerges regarding the form Brexit will take, UK equities could be well positioned. Companies have been stockpiling inventory pending the outcome; when this happens (assuming it is not a hard Brexit) it should free up cash flow at a company level and also provide a boost for sterling.
  • Over the very long term, UK equities have offered elevated levels of yields relative to bonds. Therefore, we believe it is logical to use UK equities as a source of income if you are a saver. To our mind there are also some nuances which can be applied in order to achieve better returns and income.
  • Income portfolios by their nature tend to have a value bias. This meant the sector performed well in the wake of the technology media & telecoms (TMT) boom and bust in 2000 and we feel the market is getting to a similar point now following a strong period for growth companies, where their multiples are high versus historical levels. It could therefore be time for UK equity income investors to adopt more of a value bias; it is a case of being in the right place at the right time and the best moments for value could be yet to come, in our view.
  • Another area to look at is domestic versus overseas exposure. Sterling has been weak since the EU Referendum vote in 2016, which has encouraged investors to focus on multinational companies. We believe there is an opportunity to move down the market-cap scale and increase allocations to small and mid-cap companies with more domestic exposure.
  • The IA UK Equity Income sector also allows the flexibility to hold up to 20% of a portfolio in other investments such as overseas companies, which could be a useful diversifier if companies in a particular sector look better value than their UK counterparts. In addition there is scope to invest in the debt of companies as a way of generating a total return if the equity of that company is considered too volatile. In our view these tools are a welcome addition, but we maintain a preference to use them sparingly.

Important legal information

Source: GAM unless otherwise stated.
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development. Reference to a security is not a recommendation to buy or sell that security.
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