23/07/2007
UK Equity Income
In general, higher yielding stocks have been underperforming the market in 2007 as traditionally high yielding sectors such as utilities and banks have struggled over the last six months. However, we see value in an income based investment approach, going forward, particularly among some of the large caps which now look cheap after the strong run that mid caps have enjoyed.
The UK stock market is continuing to find support from corporate activity and increasingly from improved sentiment as investors start to look beyond a peak in interest rates. Although our investment approach still leads to a bias towards mid caps, we are currently finding an increasing number of investment opportunities in large cap stocks. The strong performance of mid caps has seen the yield on the FTSE 250 fall under 2% and we believe there is good value to be found in some of the higher yielding blue chip stocks.
Large cap stocks have been trading on a discount to mid caps as the market has focused on concerns over housing and consumer spending. In many cases, earnings momentum is strong, valuations are compelling, and our analysis indicates there is little good news is priced in. We are positive on the prospects of selected banks, such as Royal Bank of Scotland, which has shown no signs of deterioration in credit quality and has the ability to sustain its earnings thanks to well diversified business operations.
Similarly, we are finding value in large cap mining stocks, which continue to trade on low ratings as the market prices in peak earnings. We believe these companies have the potential to unlock considerable value as they restructure and split up. One example is Anglo American unbundling assets including its paper and pulp business. Rio Tinto and BHP Billiton are rumoured to be implementing similar strategies.
While retail stocks are vulnerable to swings in sentiment and the level of interest rates, this provides opportunities to buy favoured stocks cheaply on the basis of our bottom up analysis. Stocks such as WH Smith, Home Retail and JJB Sports all have strong franchises and the earnings sustainability to beat investor expectations.
We believe good income stocks can be found in both the large and mid caps sectors. This is where our barbell approach is useful, allowing a focus on both growth stocks and high yielding stocks. This approach has delivered an average income growth of over 10% over the last seven years.
Karen Robertson, Manager of the UK Equity High Income Fund & the Standard Life Equity Income Trust, Standard Life Investments.
First published in Investment Week, 23 July 2007.
Standard Life Investments Limited, tel. +44 131 225 2345, a company registered in Scotland (SC 123321) Registered Office 1 George Street Edinburgh EH2 2LL.
The Standard Life Investments group includes Standard Life Investments (Mutual Funds) Limited, SLTM Limited, Standard Life Investments (Corporate Funds) Limited and SL Capital Partners LLP. Standard Life Investments Limited acts as Investment Manager for Standard Life Assurance Limited and Standard Life Pension Funds Limited.
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