Any port in a storm for discretionaries' dividend picks; Fund rule breaches on the rise
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Dash for cover
The dividend outlook continues to deteriorate. Tuesday's confirmation that the Prudential Regulatory Authority had effectively cancelled payments from banks came as a surprise to many investors yesterday, despite European regulators having done the same the day before.
HSBC was hardest hit, down 9 per cent – though its fall was in part due to a profit warning. The FT reports today that the decision has got certain bank executives muttering once again above abandoning its London listing.
The damage has already been done for DFMs. Our analysis, meanwhile, indicates that wealth managers’ ten favourite UK equity income funds held an average of 6 per cent in UK banks – and that number would be higher were it not for the portfolios that focus on smaller companies. In some cases, like JOHCM UK Equity Income, the figure stood above 10 per cent as of the end of February.
But the problems don’t end there for equity income investors. The PRA has also been putting pressure on insurers to follow suit: payments from the likes of Aviva and L&G, next due at the end of the second quarter, are now very much in danger.
Add to this the raft of companies that have already cut payouts, and the likelihood that many more will follow as the economic shutdown takes hold, and the outlook looks bleak. Globally, UBS analysts have calculated that removing bank dividends, coupled with a financial-crisis equivalent cut to payouts for all other sectors, would see total dividends across the market fall by 42 per cent.
But not all firms are necessarily at risk. Numis points to the asset and wealth management sector as one that “can still pay dividends”. That may seem perverse, given the industry’s status as a geared play on what is now a falling market. And starting yields aren’t always that enticing. But Numis points to decent earnings-per-share and balance sheet cover for the likes of AJ Bell, Hargreaves, Schroders, Liontrust and more. Right now, equity income investors may take what they can get.
Breathing room
Tomorrow marks ten months since Neil Woodford suspended his equity income fund. And it’s fair to say not one of those months has gone by without the issue of illiquity becoming more urgent still for investors. Unsurprisingly, the current crisis has exacerbated those problems still further. On Tuesday, FTAdviser revealed that Invesco’s Mark Barnett had taken a 60 per cent haircut on his unlisted positions.
The manager is now attempting to do away with those positions entirely, though that’s a process that’s not expected to conclude for a few months yet.
This kind of time horizon looks logical, given the stresses currently being seen across a variety of asset classes. In the US, too, asset managers are calling for patience as they try to sell down securities. Another FT publication, MandateWire, reported this week that Western Asset Management has asked its California public pension fund overseers for more time to get the portfolio in order.
The problem in this case relates to fallen angels: Western's investment-grade only portfolio is having to sell bonds that have now been downgraded to high-yield status.
For UK-based retail bond managers, time isn’t as much of a factor. The only constraint facing most investment-grade portfolios is that they hold 80 per cent of their assets in bonds rated BBB or above.
That gives them plenty of leeway for the foreseeable future – and, as an Investment Association rule rather than a Ucits regulation, will not be policed as forcefully as the 10 per cent unlisted asset limit that Mr Barnett was getting close to breaching. In the current moment, the benefits of go-anywhere portfolios are more obvious than ever.
Dropping out
The FCA’s decision to effectively suspend the need for discretionaries to send out 10 per cent drop notifications looks like a case of shutting the stable door too late. That may be true, but it’s undeniable the regulator has had more pressing matters on its plate of late as it attempts to safeguard consumers from the mother of all economic shocks.
What’s less understandable is the way in which said door has still been left ajar. Until October, notifications are only needed once per reporting period. Unfortunately for those responsible for sending out such messages to investors, yesterday marked the start of a new quarter. There is, of course, no guarantee that portfolios will fall another 10 per cent from this point. DFMs will hope grumbles of this kind remain purely hypothetical.
