Asset AllocatorJun 15 2020

Buyers struggle for equity income diversification; New threats to allocators' beacon of hope

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Brave new world

Market moves had been fairly uneventful for several weeks prior to the latest bout of risk aversion. Signs of a sector rotation emerged in May, but not to the extent that gets wealth managers excited. Most were content to stick to the fund selections that have served them well through good times and bad.

At first glance, that mindset is reflected by latest fund flow estimates from Morningstar. Of the 100 most popular active funds in May, just 15 per cent had previously seen negative net flows year to date.

But there were some signs of greater risk appetite: several Japan strategies saw their appeal rise notably, while gold funds were particular losers on the month. And wealth managers’ growing interest in diversified equity income strategies was also apparent: M&G Global Dividend was among the more popular active picks, courtesy of its first monthly net inflow for almost two years.

This renewed interest speaks to a newfound problem for fund selectors. Their desire to go global when it comes to equity income has come at an unfortunate time. Per our fund selection database, at the start of the year there were really only two go-to picks for global income: strategies run by Artemis and BNY Mellon.

Six months on, underperformance has seen more assets leave the former, and manager Nick Clay and co have departed the latter and are yet to arrive at new home RWC. Buyers wanting a global income offering are having to reassess their options – at a time when building a reliable dividend stream, even on a global basis, is proving harder than ever.

Heading east

When it comes to income investing away from the UK, Asia has long been an option of interest for DFMs. Their fund selection choices in this region are spread a little thinner than at the global level, and while dividend growth at an index level has been pretty poor of late, the outlook's reasonable enough by 2020’s standards.

That’s the conclusion of new analysis from Janus Henderson, at least. The dividend index compiled by its Far East Income trust found headline payouts rose by just 0.4 per cent in the year to April, the lowest rise for a decade. In the coming year, it estimates a 9 per cent fall in dividends – but needless to say that compares favourably to a “best case” 17 per cent fall for global payouts.

The uncertainty over dividends in general makes it likely that wealth firms will seek as much diversification as possible, however – and that would suggest global strategies will remain their preferred option, providing they can find a suitable candidate. And Asia is not out of the woods yet on the coronavirus front, as this morning’s news of a renewed, if thus far relatively small, outbreak in Beijing highlights.

Allocators will also be paying close attention to China’s attempts to get its economy back on track. Commentators have pinpointed the country as a potential bright spot in the global economy in the second half of 2020 – though all bets are off if a second wave does materialise.

Beijing has unveiled a new stimulus programme to help resurrect growth, which will be welcomed by investors who recall who similar initiatives helped prop up global growth in both 2008-9 and 2016. This time around, however, the plan is slightly different: infrastructure growth is high up the agenda, but consumer credit and property markets are ostensibly being kept on a tighter leash than in the past. Whether this mix produces the kind of growth acceleration to which investors have become accustomed is still very much up for debate. 

Propped up

Wealth firms faced with the tricky task of valuing suspended property funds have been given a helping hand today, via the reopening of BMO Property Growth & Income. The fund is a particular favourite of DFMs, for the same reason that it’s been able to reopen ahead of peers: holdings are spread across both physical property and real estate equities, with the latter accounting for just 30 per cent of the portfolio.

Those strategies who focus solely on real assets are, as we discussed last week, unlikely to open for a while yet, given the difficulty valuers have in reassessing the worth of commercial properties in a post-pandemic world. Which is why a separate announcement this morning may hold more weight for the sector: Fiona Rowley’s retirement from M&G feels like another sign that the world has irrevocably changed for such strategies.