Exposure to the energy sector within UK equity income funds which has offered some protection to investors in the recent years of high inflation, has meant that over the past three years the average UK equity income fund performed better than the typical technology or global fund sector.
In August 2021, the inflationary crisis began to take off with CPI jumping to 3.2 per cent, up from 2 per cent in July of that year, Laith Khalaf, head of investment analysis at AJ Bell noted.
Consumer price inflation then climbed all the way up to a peak of 11.1 per cent in October 2022 before gradually falling back to current levels.
The latest inflation figure crept up a touch to 2.2 per cent, but this is "well within normal levels of variation" around the target and was also accompanied by falling core inflation.
Pointing to the investment data compiled by AJ Bell, Khalaf said: “Three years on from the beginning of the cost of living crisis, the scars still haven’t healed, but the worst is now firmly in the rear-view mirror.”
The inflationary crisis had a profound effect on the savings and investment landscape, prompting rising interest rates and a sell-off in previously unassailable parts of the market, in particular bonds and technology stocks.
Khalaf added: “Looking back on performance over the last three years since the cost of living crisis began it’s clear that some investments have helped investors grow their wealth in the face of rising inflation, while others have capitulated in its presence.
“One perhaps surprising result is that the average UK Equity Income fund has performed better than the typical Technology fund, or the Global fund sector. A large chunk of UK dividends emanate from the energy sector, and this exposure has afforded some protection to investors during the inflationary crisis.
“Indeed, the UK Equity Income sector has outperformed the broader UK All Companies sector by 10 percentage points over the last three years (the latter has returned 5.6 per cent compared to 16 per cent from the UK Equity Income sector).
“UK Equity Income funds tend to have a larger cap focus than UK All Companies funds, which prefer to go hunting in mid and small caps – areas which have performed well over the long term, but not the last three years. It’s worth noting that despite its relative success, the UK Equity Income sector has still not quite managed to produce a positive real return over the last three years.”
