HUB NEWS PANEL DISCUSSION 2021
Panel discussion, hosted by Cherry Reynard, with:
Simon Young – Portfolio Manager, UK Equities, AXA Investment Managers
Jan Oliver – Partner, Income Strategies, Baillie Gifford
Jason Borbora-Sheen – Portfolio Manager, Diversified Income Fund, Ninety One
- Dividends were hit hard in 2020 with the FTSE All Share dividend payout down 34%
- Half of UK companies either increased, restarted or held their dividends steady in Q1
- Flexibility is vital in finding dividends and dividend growth in this new environment
Equity income and bonds have traditionally done the heavy lifting in income portfolios. However, both areas came under pressure in 2020. Companies cut dividends to preserve cash during a tumultuous year, while bond income slumped to new lows in the face of looser monetary policy. Are they still the big hitters for an income portfolio?
It’s been a grim picture on dividends. Simon Young, portfolio manager of the AXA Framlington UK Equity Income Fund says: “We’ve had national lockdowns impacting a number of sectors. We’ve had regulatory intervention to suspend dividends for the banks and we’ve also had management caution as companies haven’t encountered a pandemic before and don’t know the impact on their cashflows. All of that’s added up for the FTSE All Share to cut its dividend by 34% in the year to March 2021.”
Active managers have managed to swerve the worst of these losses in many cases. In the AXA Framlington fund, the dividend cut has only been around 16%. Equally, investment trusts have been able to dip into reserves to preserve the payouts for shareholders. Global managers have also been at an advantage with a very mixed picture across different regions. In North America, for example, dividends grew over the year.
Improving outlook
Today, there are some signs of improvement with companies resuming dividend payments across the world as they get more transparency on earnings and economic recovery starts in earnest. For example, Link Group’s Q1 Dividend Monitor showed half of UK companies either increased, restarted or held their dividends steady in Q1, compared to just one third in Q4 2020.
However, Jan Oliver, partner on the Actual Income Team at Baillie Gifford, cautions that things will not go back to the way they were pre-pandemic: “Dividends are not getting back to 2019 levels for quite some time. So many companies that were the stalwarts of the income universe have had to reset their considerations. The oil majors, for example, will need to spend a lot of their revenues on transitioning their business, so it won’t be coming from them.” Equally, she says, US companies may well prioritise buyback programmes rather than paying dividends. With around half of the world’s dividend paying companies, this limits the options available to equity income investors.
Flexibility is vital in finding dividends and dividend growth in this new environment. Young says the pandemic offered opportunities to buy into resilient companies at more attractive prices. Greggs and Compass group were two examples in his portfolio: Both have been impacted by enforced lockdowns and the pandemic. Both have great long-term dividend track records, growing at over 9% per annum for the prior decade. They’ve taken the opportunity to buy in at lower valuations although neither companies is paying a dividend today. This barbell approach may not be an option for those income managers who need to ensure each stock pays higher than the All-Share.
Equity income versus fixed income
Jason Borbora-Sheen, a manager on the Diversified Income and Cautious Managed funds at Ninety One has a multi-asset mandate: “When investors are looking for income, they shouldn’t lose sight of the total return…We try to balance the level of yield, the resilience of that income, and finally, the potential upside. Equity currently offers a number of attractions, though one of its weaknesses is a lower degree of resilience relative to other asset classes. With fixed income, you’re more likely to receive the level of income, but the level of income is much lower.
He continues to favour equity income over fixed income: “As economies come back on line and there’s a normalisation of earnings, these dividends will come back on stream….Also, the relative valuation of equity income to typical market indices is near all-time relative lows. There’s a lot of negativity in the price.”
He says there are opportunities in fixed income, but not at the defensive end of the asset class. There are particular problems in gilts, he believes. The UK economy could bounce back quickly and this could see a snap normalisation in today’s low yields as interest rate expectations rise. Credit markets are also unappealing, he says, with equity income offering similar characteristics at better valuations.
Instead, he is looking internationally for opportunities: “The three I’d pick out are Australia, New Zealand and China government bonds, all of which offer absolute yield higher than UK, all of which have been through an adjustment of growth expectations.”
From compelling valuations to improving payouts, there are strong arguments that equity income has a better year ahead of it. Fixed income, particularly at the more defensive end, is still difficult, but there are options for those with a flexible global mandate.
