Yielding ground

The UK equity market might be subject to a growing number of naysayers in the DFM space, but domestic stocks haven't lost their appeal when it comes to dividends. Our MPS tracker shows wealth managers still prioritise income when it comes to UK allocations - more so than any other individual region.

So, in keeping with yesterday's attempt to look on the bright side, we should note that the share price falls of recent months do at least equate to even juicier yields than normal.

Are funds making the most of this? We've used our MPS tracker - which monitors DFM holdings across more than 300 model portfolios - to draw some rough and ready conclusions.

And a look at the 10 most popular UK equity income funds in our database suggests a strong showing. As the chart below shows, half yielded more than 4.5 per cent even prior to December's falls being factored in:

DFMs' top pick, Schroder Income Maximiser, yielded 5.1 per cent at the end of November. But it isn't the absolute winner in terms of distribution levels, with both JOHCM UK Equity Income and Chelverton UK Equity Income ahead as of that date.

Inevitably, there's always a trade-off to be made for those funds that target a total return. The lowest yield, 3.3 per cent, comes from Evenlode Income, which eked out performance of 0.4 per cent last year. Evenlode was the only one of the top 10 to make money in 2018, and indeed the only fund of the 90 portfolios in the entire UK Equity Income universe that did so.

Losses aside, seven of the top 10 did outperform their peer group over the last year, suggesting DFMs haven't taken their eye off returns, either, when it comes to income selections. That focus also explains the continued absence of Neil Woodford and Mark Barnett, high-profile names dogged in the near term by poor performance, from wealth managers' buy lists.

A fine balance

The first few days of 2019 have underlined just how finely balanced sentiment is at the moment - torn between risk and reward, between buying the dip and hunkering down.

DFMs will have their own views on whether we're at a turning point or if this effectively another false alarm. As we’ll discuss in the coming weeks, many have started to position accordingly: the falls seen at the end of last year have proved significant enough to justify model portfolio rotations.

But the difficulty facing both those changing course and those staying in lane is emphasised by a simple look at asset class performance over recent months. Using Investment Association sectors as a (fairly crude) proxy, we’ve examined the number of weekly positive periods versus weekly negative periods each has experienced over the past 12 months. 

The results are striking in their uniformity. Almost every sector has posted a similar number of periods in the red as in the black: out of a total of 52, the mean number of positive periods is 26, the mode is 25, and the median’s 27.

Just a handful of sectors - notably global equity income, tech and telecoms, and Japanese smaller companies - managed more than 30 weeks in which they didn’t make a loss, according to the FE data.

It’s a similarly fine balance over the past six months, and in stark contrast to longer-term figures. Even the direct property sector - by far most consistent performer over recent time periods - has now started to experience some familiar jitters of its own, as we reported at the end of December. The figures suggest there’s simply nowhere to hide right now, and that in itself makes allocation calls harder than ever.

Short shrift

Another big name has added their voice to those who think BBB-rated corporate debt looks particularly vulnerable at the moment. Steve Eisman, of The Big Short fame, doesn’t think a US recession is on the cards, but has concerns about the lowest-rated portion of the IG debt universe nonetheless. 

His principle worry is a potential liquidity squeeze if big issuers get downgraded to junk status - leading to BBB-debt underperforming even those bonds that are, on paper, riskier than investment grade. 

It’s a fear that’s been around for some time now: if this scenario does play out then no one can say they weren’t warned. 

By the same token, it could yet prove a dog that doesn’t bark. From sterling-based investors' perspective, there’s little evidence that investment-grade debt is showing any unusual signs of stress. 

IG bond funds have performed as you’d expect during the current malaise: outperforming high-yield and strategic bond peers without enjoying the same kind of bounce seen for gilts. That's reassuring, because as we discussed back in October last year, many of those strategic bond funds have chunky weightings to triple-B paper. Right now it’s one small measure of reassurance for harried wealth managers.