Yielding ground

Are UK equity income yields too good to be true? Market falls have increased their attraction, but that means risks have also risen. Chief among them is the concern that these dividends won’t prove sustainable. 

Then there’s the fear that income funds are relying on too few companies for yield. The market as a whole may be offering a better headline payout, but much of this is still being derived from a small cohort of high-yielding mega-caps. 

Per the latest dividend monitor from Link Financial Services, the top five dividend payers in the UK market account for 34 per cent of total payouts. And the average yield of these five companies (HSBC, the oil majors, Glaxo and BAT) is now 6 per cent.

So we’ve examined DFMs’ favourite UK equity income funds, as measured by our MPS tracker, to gauge their exposure to the largest dividend payers. The results are below.

The average allocation to the top five names stands at 15 per cent of a given portfolio. Broaden it out to the top 15 dividend payers - which make up 58 per cent of total payouts - and typical exposure stands at almost 30 per cent. 

But there’s plenty of dispersion for those DFMs who are after something a little different. Gam UK Equity Income has just over 10 per cent allocated to the top 15, which is around a quarter of the JOHCM fund's exposure. Others, like Neil Woodford or Evenlode Income, have little in the top five. That’s to say nothing of the small and multi-cap income funds not included here.

And while most funds’ exposure to the biggest names does account for a material part of their portfolios, they’re still more diverse than even a growth-focused index like the FTSE All-Share. That benchmark has almost 30 per cent in the biggest five payers alone. For now, fund selectors can be relatively content that they're not loading up on more dividend risk than is really necessary.

Pacific preferences

Both Chinese equities and emerging markets in general have shown signs of being comeback kids lately after a dour 2018. Their soaring start to the year has also been a reminder of how quickly prices (and sentiment) can shift.

For allocators, these movements can be both a blessing and a curse. So it’s reasonable to think DFMs’ preferred Asia fund choices will be at the less volatile end of the scale. To test that theory, we’ve taken a closer look at the favourite picks in the sector:

The obvious finding is that, in contrast to most asset classes, DFMs are clearly favouring one asset manager above all others in the region. Schroder Asian Income, when combined with its Maximiser equivalent, is the most popular choice. Robin Parbrook’s Asian Total Return strategy is also highly ranked, as is the firm’s Asian Alpha Plus vehicle.

But the top picks have had mixed fortunes when it comes to medium-term performance. Of the active growth funds, only offerings from Invesco, Fidelity, Schroder Asian Alpha Plus and Hermes have all beaten the IA peer group over three years.

And it’s not just the more growth-oriented funds that have struggled over this period. Stewart Investors Asia Pacific Leaders, whose defensive approach needs little introduction, has also failed to keep pace on a three-year view. Seeking a less volatile strategy isn’t a failsafe approach, even in Asia Pacific.

Bullion bounce

Overnight, the FT’s Market Forces column has highlighted something of a red flag for markets amid the calm of early 2019: the continued rise in the price of gold.

Unusually, this bounce has continued even as the US dollar has started to strengthen again in recent days. There’s various theories why this might be happening, from seasonal central bank buying to the prospect of looser monetary policy returning to the agenda later this year. 

And what this shift may say about the global economy is more important than what it might mean for gold itself. Wealth managers will be conscious that the precious metal, currently trading around $1,345, hasn’t been past the $1,400 mark for more than five years. Some allocators retain a small exposure in their portfolios, but as we’ve discussed, others have been cutting back in recent months. It'll take more than a short-term rally to restore faith in bullion.