The UK equity income sector has been a dismal place to invest in recent years. While investors made an average of 51% in a North America fund, or 39% in a global fund, they made an anaemic 6% in an equity income fund in the last three years. Not only that, they have seen their income take a nose-dive.

The reasons for this weakness have been well-rehearsed. An uncomfortable sector mix of old economy laggards and low growth, mature businesses, a tough pandemic and dreadful performance from individual funds have conspired to make this a sector to avoid. It is a far cry from its place as the go-to core holding in every UK investor’s portfolio.

However, over the past year, this has changed. While it hasn’t achieved the giddy heights of the UK Smaller Companies sector (average fund up 54%), UK Equity income funds are holding their own, with a creditable average performance of 28%. At the same time, dividends have bounced back surprisingly quickly. The latest UK Dividend Monitor from Link showed UK dividends rising 51% to £25.7bn year on year as companies that had cancelled dividends resumed their payouts.

Sceptics might argue that this is simply a ‘dead cat bounce’ for a sector that has been lacklustre. And certainly, there is an argument that some of the fundamental problems for the sector haven’t gone away. Dividends still come from a narrow range of companies. In the second quarter of 2021, 54% of UK dividends came from just five companies. In the second quarter of 2019, it was 35%.

Equally, they still come from a narrow range of sectors. Much of the recent growth in dividends has come from the mining sector (up 78% year on year). The mining sector is currently benefiting from the ‘build back better’ impulse from global governments, but it is unlikely to see the growth of, say, the technology sector.

Nevertheless, the UK market is undoubtedly sufficiently rich and diverse to support a range of equity income strategies and there are managers within the sector looking beyond the blue-chips. It is still difficult to see the long-term merits in a traditional UK equity income strategy, but for the more creative and skilled fund manager, there may be better times ahead.

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This article was sourced from Adviser-Hub.co.uk.