Base rate stuck in a rut but equities solid

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EQUITY income funds were solid performers during 2012 and should still be attractive to investors this year, which is good news for those using their investments to top up their pension income at a time when the base rate is stuck at 0.5 per cent with no signs of an increase on the horizon.

What is good for mortgage payers and industry can be crippling for savers.

Last year saw many income funds producing double-digit returns on capital and income yields higher than many deposit accounts.

Schroder Income produced a total return of 25.27 per cent in the year, and Artemis Income 14.02 per cent, while the ever-popular but more defensive Invesco Perpetual High Income returned 7.68 per cent.

Investors who feared they have missed their chance should take heart from Schroder’s’ head of UK Equities, the widely respected Richard Buxton, who has been predicting a decade of potentially double-digit returns.

He cites the cyclical nature of markets over the past 100 years and more, and predicts we are emerging from a sideways phase into a period of fabulous returns. Despite the economic gloom, Buxton says the private sector is creating jobs and net new business creation is at double-digit year-on-year rates of growth.

Valuations, in his opinion, are low enough to give positive real rates of return for investors, possibly double-digit per annum.

So for investors able to take a bit of a risk, the Equity Income Sector is certainly still worth a look.

A typical yield could be around 4 per cent net for a basic rate taxpayer accessing an Equity Income Fund, at a time when fixed-term deposits are struggling to offer 3 per cent before tax.

They offer the capital security an investment fund cannot, but what they cannot offer is the potential to grow capital and, as can be seen above, that growth can be very attractive.

Jeffrey Deans is chairman of Save & Invest Financial Planning