To round off our recent series around income, we have had a peek at our database to see how the average yield on the income portfolios we cover has been moving with markets in recent quarters.
Perhaps unsurprisingly, our data shows investors whose priority is income have been enjoying a better time of it lately, with the average yield on the income portfolios we cover being 3.3 per cent in April, which compares with an average of 2.2 per cent when we first ran this exercise in March 2022, and 3.2 per cent in December 2022.
As ever, there is wide distribution within the data, with Brewin Dolphin’s income portfolio presently yielding just 1.92 per cent, the lowest among the peer group we cover, while at the other end of the spectrum, Handeslbanken are the only firm with a model portfolio yield of more than 5 per cent.
The spread between yields has fallen, however. Of the 20 income portfolios we looked at, nine had increased their yield and seven of these were in the bottom 50 per cent.
Another nine cut their yields and six of these were in the top 50 per cent.
The canny among you will have figured out that two DFMs saw no change.
Among the DFMs with an above average yield are RSMR and LGT, which are the only other firms on the database with a yield above 4 per cent.
The number of DFMs offering yields between 3 and 4 per cent has gone up from nine to 11.
So how are DFMs achieving those yields? Well on average exposure to equities in income portfolios has gone down while exposure to bonds has gone up.
We have discussed multiple times the fact that exposure to UK equities is falling across DFM portfolios and the same is true for income, where UK equity exposures have fallen disproportionately to overall equity exposures.
But perhaps the most interesting thing is the lack of any particular correlation between the yields achieved and exposure to any one asset class.
While Handelsbanken has the second largest allocation to fixed income at 40 per cent and the highest yield, the firm with highest bond exposure is that of Rathbones, whose yield is squarely in the middle of the range at 3.4 per cent.
The average bond exposure in the income portfolios we cover is 31 per cent, and the firm with the least of its capital in fixed income Wise, at just 15 per cent, but their portfolio yields 3.9 per cent, which is at the upper end of the range.
When it comes to equities, the average exposure is 51 per cent, with Wise having the biggest overweight at 74 per cent, closely followed by the Evelyn Active portfolio at 66 per cent, while Brooks Macdonald are on 61 per cent.
The lowest allocation, conversely, is that of Handelsbanken, at 28 per cent. Given this is the portfolio with the highest yield in the whole peer group, it may be the folks in Kingsway are adopting the traditional market move of getting income from bonds and viewing equities as primarily a growth asset, something which is borne out by a glance at their balanced growth portfolio, where the allocation of 55 per cent is basically in line with the peer group.
Income is likely to be a primary consideration for clients in the coming years and we will continue to monitor how the DFMs we cover are responding to that.