Investment Income CPD Course  

What are the long-term trends for equity income vs fixed income strategies?

This article is part of
Understanding current trends in income

Net retail sales of the IA Global Equity Income and IA UK Equity Income sectors from Jan 2017 to Jan 2018

 Jan-17 Feb-17 Mar-17Apr-17 May-17Jun-17Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18
IA Global Equity Income sector 3253-344368122-393468-94430-23
IA UK Equity Income sector-76-18323973-23-428-79-165-9-272-119-87-339

Source: Investment Association

“Around the globe, dividends are becoming more established and important, and 2017 was a bumper year with 11 out of 41 countries making record payments, according to the latest Janus Henderson Global Dividend Index,” he adds.

Andrew Morgan, portfolio manager of Alpha:r2 at Walker Crips, flags the issue of concentration risk in equity income portfolios.

“For equity managers, a successful dividend strategy demands that companies they invest in not only have high dividend yields, but yields that are sustainably growing, together with good interest cover and cash flow,” he explains. 

“This inevitably results in a concentration in certain sectors, such as utilities, pharmaceuticals, tobacco and oil majors.” 

Far and wide

This also accounts for the growing interest in global equity income portfolios, however.

Mr Morgan suggests: “One obvious result of this concentration, in what are otherwise generally pretty conservative companies, is that there is also a concentration in regulatory and political risk: each of those key sectors has an above-average exposure to regulatory change. 

“One way of mitigating this concentration of risks has been to diversify geographically. A big trend in the past 10 to 15 years has been the growth of global equity income as a sector, which allows the opportunity set to widen dramatically, while reducing risk but maintaining the higher income levels.”

Fixed income managers, by contrast, have a broad array of sectors from which to choose, he adds, noting “although inevitably those more stable sectors, like utilities, are the ones which allow the greatest levels of indebtedness”.

He has seen a couple of significant trends in fixed income strategies over the past 10 years or so.

Mr Morgan highlights: “A clear trend over the last decade has been the spurning of gilts, as quantitative easing has pushed their yields ever downwards, well below the rate of inflation.

“For private client managers, another change over the past 10 to 15 years has been an increased availability of bonds for smaller investors.” 

He explains that rather than having minimum investment sizes of £100,000, a variety of bonds are readily available with minimum investment amounts as low as £1,000. 

“This allows clients to take advantage of fixed income investments, with their security of income and ability to balance a portfolio at a time of equity turbulence, while simultaneously bringing down the overall total expense ratio of the portfolio.”

What will the next 10 to 15 years bring for income investors in terms of long-term trends?