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A tipping point for sustainable funds' UK market share; Two types of optimism for equity income

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Supply surge

For all the interest they receive from investors, sustainable funds still make up just 5 per cent of total UK retail industry assets, according to Investment Association data.

But as demand increases, that figure’s rising by about two percentage points a year – a growth rate that compares favourably with even tracker funds’ rapid emergence over the past decade. Last year, sustainable funds accounted for 40 per cent of net retail sales in the UK market. Supply is now following suit.

Our analysis of data from Morningstar shows that sustainable funds’ share of all new product launches has crept up in recent years, before leaping in 2021.

In the UK-domiciled fund universe, funds with some kind of ESG slant accounted for 18 per cent of all fund launches in the first half of 2018. That rose to 24 per cent in 2019, before dipping to 21 per cent last year.

The latter figure looks like a statistical quirk rather than a reversal of the trend, not helped by the Q1 2020 market nerves that saw many put launches on hold.

In any case, the remainder of 2020 very much proved another breakthrough moment for ESG – and that’s underlined by launch statistics so far this year. Some 40 per cent of all funds rolled out to the UK market during the first six months of 2021 have a sustainable theme.

Unsurprisingly, that’s a record share of market. But if we’d asked readers to estimate their own figure in advance of today’s newsletter, we suspect many would’ve instinctively opted for a higher number.

Such assessments will be influenced by the many firms who’re “repurposing” existing strategies as sustainable offerings, on top of launching new funds. As we reported earlier this year, Morningstar estimates some 250 funds across Europe were rebadged in this way in 2020, and more have followed suit in recent months. Add to that the spate of new launches, and it’s clear that fund selectors’ due diligence processes are having to work overtime to split the wheat from the chaff.

Two types of optimism

A report featuring the line “we have scrapped our worst-case forecast altogether” is always going to make for welcome reading on a Monday. So it is with Link’s Q2 Dividend Monitor – and given the forecast horizon in question only extends to the end of 2021, the risk of overconfidence looks limited.

The reason for this positivity is that headline UK dividend payouts rose 51 per cent year-on-year in Q2, with underlying payouts up 44 per cent.

Of course, as the report itself notes, Q2 is “the first to be set against a Covid-19 quarter”, meaning comparisons were always going to look good. Timing factors also contributed. But with companies in the industrials, basic materials and financial sectors overdelivering, and the cap on bank dividends removed ahead of schedule, Link has turned more optimistic.

This too is all relative, however. The prospective yield on domestic indices rose in the second quarter as the anticipation of higher payouts offset the climb in the benchmarks themselves.

But those yields still pale in comparison with years gone by: if the FTSE 100 were to yield 3.6 per cent as predicted over the next year, that would still only take it back to 2015 levels. A prospective yield of 1.7 per cent for the FTSE 250 is well below anything seen over the past decade.

Wealth managers tell their clients to prioritise dividend growth over starting yields, of course – but many will be looking back fondly at pre-Covid income statements for many years to come.

And in terms of long-term prospects, Link's optimism is rather less dramatic. It’s sticking with 2025 as the point at which UK payouts regain their pre-crisis highs, but says “it may be earlier [in the year] rather than later”.

Real deal

Last Thursday we looked at some of the competing theories of Treasury yields’ recent decline. Whatever the truth, the trend is now setting some records: real yields fell to record lows this morning.

It’s not just a US phenomenon, either: the FT notes that real yields in the eurozone did likewise. In the short-term, that’s likely to be good news for investors, given how the relative attractiveness of an array of other risk assets will have improved as a result.

The longer-term implications are, as ever, much harder to spell out. That leaves investors once again awaiting the Fed’s next policy meeting on Wednesday for further clues.

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