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Mixed messages abound in Bestinvest’s latest six-monthly ‘Spot the Dog’ report. The number of portfolios that meet its “dog fund” criteria this time round stands at 86 – slightly higher than in the last report but well below levels seen earlier in the pandemic.
One of these underperformers is an old friend: JPMorgan US Equity Income - a fund we have discussed several times before and which remains very popular among DFMs.
But first, to remind readers: a ‘dog’ fund is defined by Bestinvest as one which failed to beat its benchmark over three consecutive 12-month periods, and which has underperformed its benchmark by 5 per cent or more over the entire three-year period of analysis.
Once again size matters: a good number of large funds have made the list, helping to bring the level of assets in dog funds up from £29.6bn to £45.4bn. Plenty of cash continues to languish in underperforming funds.
If that’s a problem for investors generally, DFMs can take some solace from the fact their model portfolios are only marginally exposed to such mutts. Of the 86 funds that made the latest dog list, just 16 sat in the DFM portfolios tracked by the Asset Allocator database, as of mid-2021. Half of these 16 names were held by two firms or less.
What’s also clear is where the pain lies. With markets rising generally and the (mainly non dividend-paying) ‘Fanmag’ stocks powering US and global indices until very recently, income funds have struggled. Of the 14 funds from the IA Global Equity Income sector that made the latest Bestinvest list, eight were also held by firms in our database.
This brings us back to JPMorgan US Equity Income. Three US equity income funds favoured by the DFMs we track have also achieved ‘dog’ status and one of these is our old friend.
This £3.9bn fund remains the most popular US equity fund in our database by some distance despite its performance. Its lack of exposure to big tech means holders will probably not be too worried about its latest appearance.
If anything, that’s the correlation between funds which appear in Bestinvest’s ‘dog’ list and which are backed by DFMs. Names like Fidelity Global Dividend, BNY Mellon Global Income and M&G Global Dividend arguably shouldn’t be expected to outperform when big tech leads the charge.
Indeed JPMorgan US Equity Income has shown signs of turning things around: over three years it underperformed its IA North America sector by 8.3 per cent. But over three months it has, coincidentally, outperformed its sector by 8.3 per cent.
Investors will be hoping this is a sign this fund and others of the same ilk can pay their way if a market regime change really is on the cards during 2022.
Yield to the inevitable
Buyers sticking to their global equity income guns are well acquainted with an old dilemma demonstrated by the above. In recent years US stocks have powered ahead, driven largely by the Fanmags.
Yet the US market yields relatively little, with most of the big tech names not paying much of a dividend. For a global income manager, that means risking lower total returns than the market if you go further afield for better yields.
But here comes a silver lining. Research firm CFRA notes that while the S&P 500 Information Technology sector offered a dividend yield of just 0.78 per cent at the end of 2021, some serious growth in payouts has occurred within the sector in the same year.
Of 76 companies in that sector, 44 paid a dividend, with nearly all of these either upping their payout or initiating one in 2021. A result is that tech contributed 17 per cent of the overall income for the S&P 500, making it the largest payer of dividends.
None of this suggests that names like Amazon and Alphabet will suddenly start paying dividends. But it does offer hope for income prospects in the sector more widely, while also providing a boost for the US.
Income funds may one day be able to achieve a greater balance of investment styles if more of the US market, and the tech sector, qualify for inclusion. Whether value-minded income managers wish to do that, especially on the cusp of potential further difficulties for tech and growth, is another question.
Surging energy prices and bumper profits for the likes of Shell and BP make a bear case for the sector less than straightforward, but that’s what some are maintaining.
BlackRock, for one, has used a weekly commentary to highlight an expected “repricing” of energy assets over the coming years. The company argues prices on “green” energy assets have risen between 2016 and 2019 and predicts more of the same between 2021 and 2025. It models the opposite outcomes for “browner” assets such as traditional energy stocks.
Of rallies in traditional energy shares, BlackRock counters: “This is a feature of transition, we believe, as they can benefit from mismatches in supply and demand as the economy is being rewired to reach net-zero carbon emissions”.
If recent gains do nothing to prevent the effects of the coming transition, other issues remain unresolved for fans of divestment and exclusion as an ESG strategy.
Critics of divestment worry that selling off the likes of traditional energy shares and depressing valuations will simply entice private institutions to buy them on the cheap. It’s another area of conscientious investing where a clear answer is sorely missing.