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Yielding to reality
The dividend pain is starting to be felt by UK investors. Peel Hunt has calculated that over 40 per cent of the UK dividends scheduled to be paid in the remainder of 2020 have already been cancelled - and just 11 per cent have been confirmed. Today, AJ Bell figures show one in five individual investors say their investment income has already dropped by 50 per cent or more.
That said, 12 per cent say they don’t know yet whether their income has been affected – the broker suggests that's because they’re fund investors who’ve yet to feel the impact. This raises an important issue for DFMs, too – because the impact of widespread dividend cuts may be yet to fully hit home for their own clients.
Our analysis of discretionaries’ dedicated income model portfolios shows the stated yield on these strategies has, in fact, risen over the past 12 months, from 3.4 per cent to 3.7 per cent as of April 30.
Returns are fractionally in the red over the period, so a slight increase could be expected as a result of a drop in prices. Yet several of the firms in our sample have seen yields rise by a full percentage point or more over the period. They’ve been able to increase payouts without taking on more risk – or without moving up the risk-rating scale, at least.
And there’s little sign yet, despite the dividend damage, of these stated yields falling back. That’s because payouts are typically calculated - by both DFMs and their underlying fund managers – on a 12-month historical basis. All told, what this means is that wealth managers will have to be very clear in how they communicate with clients in the coming months. Portfolio statements will soon be telling a very different story to that implied by the yields published on factsheets.
Bank of America’s latest fund manager survey shows little change in behaviour in the aftermath of investors' angst-free April. Average cash levels remain at 5.7 per cent, barely down from last month’s 5.9 per cent, and bond allocations are at their highest for almost 11 years.
It’s a reminder that global equities, ex-US, have still yet to really recover from the panic seen in March. The Euro Stoxx 600 is flat since the end of Q1; the FTSE 100 is 6 per cent higher, but under the circumstances that isn’t much of a rally. Things may be much calmer, but animal spirits aren’t exactly rampant.
So in the main, BofA’s contrarian indicators are still saying “buy” risk assets. The notable exception is high-yield bonds – the technical recommendation here is to remain short.
True, the Fed’s entry into the junk bond market may have made historic parallels redundant. But the reticence does help show why DFMs are also retaining a degree of caution despite their optimism on credit in general.
There’s a similar unease on the economic front: just 10 per cent of those surveyed by BofA are expecting a V-shaped recovery. Some 75 per cent think U or W shapes are the order of the day. And two thirds of investors think there’s more pain to come for markets, viewing the current uptick as a bear market rally. As lockdowns ease, the next few weeks will go some way to showing whether this caution is justified. But it will take longer than that to restore confidence to the market as a whole.
The 20 per cent rise for US biotech firm Moderna yesterday shows the potential rewards on offer for those making ground in the race for a coronavirus vaccine. Never mind the fact these were early stage trials, that the difficult part is still come, or that the prospect of monetising such prospects is uncertain – the stock was away to the races.
The company has since fallen 5 per cent in pre-market trading today, after the company launched a share issue to fund manufacturing capacity in the event that its vaccine does ultimately materialise – another sign that success won’t just be a blank cheque. But the episode does emphasise that healthcare positions can benefit from the current unparalleled interest in medical advances.
This trend lends itself to biotech trackers; for active managers, calling specific winners is, understandably, next to impossible. Still, it probably shouldn’t be a surprise that the big holder of Moderna on UK shores is a familiar name: Baillie Gifford American. At the moment, it’s a fund that simply can’t do any wrong.