Each week, a professional investor tells MoneyWeek where he’d put his money now. This week: Gerard Sweeting, director of wealth management, Charles Stanley.
As we see further signs of life in developed economies, the perceived wisdom is that we can expect reasonable rates of return in equity markets over the medium term. We believe Britain will see both business investment and wages grow faster than the rate of inflation for the first time in a few years.
This should be good for corporate profit growth and, in turn, dividend growth. Global dividend payments topped $1trn in 2013, according to Henderson Investors, up 2.9% on 2012. Since 2009, payouts are up by 43%, well ahead of UK inflation over the same period.
As the period of low interest and low bank deposit rates looks set to continue, income from portfolios remains an area of vital importance for many clients. However, at the same time, rates are only likely to rise in the future from here, which means that the traditional safe havens of gilts and investment-grade corporate bonds are unlikely to keep producing the returns we’ve seen over the past few years.
As a result managers have to be creative in finding investments that can meet income-hungry investors’ criteria of being both lower risk and delivering a higher-than-average income.
Here are three different funds I like. One focuses on growing dividends while the other two provide alternatives to the standard bond fund.
The JOHCM UK Equity Income fund takes a yield-focused approach that was developed and fine-tuned while the managers were at Newton and later at JOHCM. This focus on decent dividend yields forces managers to look for where value exists in the market, which we like: managers are notoriously bad at selling stocks and this process removes an element of emotion from the decision to sell.
The fund is big, with about £2.5bn of assets under management. But while size can sometimes cause headaches with buying and selling stocks, it’s not the case for fund managers Clive Beagles and James Lowen, because the process they follow means they are early into positions and early to exit. The approach has kept investors out of bubbles when they burst in the past, notably the dotcom bubble in 2000 and commodities in 2008.
The fund is likely to underperform when sectors with low or no dividend yields, such as commodities in 2007, are driving returns. The current yield is 4.2%.
With interest rates still at rock-bottom levels, yield-hungry investors are rediscovering the attractions of commercial property.
The SWIP Property fund gives broad exposure to the UK commercial property market, diversified by both sector and region. It’s run by an experienced management team, and there is nothing exciting or unusual about it, which is one reason why we like it.
In line with long-term history, we expect the bulk of the returns on the fund to be generated by income payouts, with the prospect of capital appreciation more limited. The yield is 3.7%.
The Aviva Strategic Bond fund is run by Chris Higham, who has a high degree of flexibility in the management of the product. The fund has around £160m in assets under management, which gives Higham greater scope than many of his peers to switch the focus of the portfolio around in a timely fashion.
This flexibility, and having the scope to trade effectively, will be key to delivering worthwhile returns in what promises to be a tougher environment for fixed income.
The portfolio holds around 80 issues (largely cash bonds with little derivative exposure), which is rare in this particular sector, where the larger funds will often hold upwards of 1,000 positions in their portfolios. While this means there is more stock-specific risk to this fund, there is also, we believe, more scope to outperform. The current yield is 4.3%.