Our study of the largest peak to trough falls of UK equity income funds shows that many are, in fact, far from defensive holdings. Since 2009, some experienced a drawdown of over 15% compared to just 6-7% for less volatile funds.
The higher-risk nature of some UK equity income funds is further illustrated by the three year risk/return chart which shows that many portfolios remain more volatile than the FTSE All Share index.
Of course, there is nothing wrong with an equity income fund taking a higher-beta approach as long as investors are comfortable with the fund’s risk/return profile. Higher-risk equity income funds should be expected to out-perform the sector in a rising market but they should also be expected to under-perform in a falling market. However, for more conservative, risk-averse investors, it may be more appropriate to stick to less volatile options, avoiding funds which are arguably more like the equity growth funds found in the IMA All Companies sector.
Michael Clark is Portfolio Manager at Fidelity
