Income Funds: Returns pressures, stocks the answer?

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Strange days in financial markets. Super low interest rates are forcing income-hungry investors to look at alternatives to government debt and corporate bonds. The FT yesterday was heralding the return of stocks as income providers…

Rock-bottom government bond yields are pushing some pension schemes to reverse the industry’s decades-long rush out of equities and into fixed income.

The move is being prompted by a dramatic crossover in yields between major asset classes, with 85 per cent of UK FTSE 100 companies now offering higher income than the 1.5 per cent available on 10-year gilts and the S&P 500 in the US trading on a yield of 2.6 per cent, well above the 1.54 per cent yield of 10-year Treasuries.

Yes, yes we get the low low bond yields but if Bill Gross thinks the debt markets are “rigged” we should be careful about comparing debt with stocks.

The yield of the MSCI Composite European index is now 4 per cent, comfortably above the sub-3 per cent yield of the average single-A rated eurozone corporate bond, according to Union Bancaire Privée, a Swiss private bank.

WealthiFi doesn’t need to be persuaded about the logic of strong franchises paying and  growing their dividends each year. What is not so clear is how income funds deploy capital. If it’s a big popular fund it is unable to invest in smaller companies and falls victim to the T-Rex syndrome. And then there are the lazy funds who will deploy capital in line with industry weighted benchmarks.

In both cases there is a real danger savers will end up with big stocks concentrated in big sectors. Size bias is both financially illogical and dangerous. Need we remind our readers that just 15 companies provide two thirds of all dividend income in the UK!   One of those 15 is HSBC which likes to keep company with Mexican drug runners and Mid-East terror sponsors. Oh, and we now know another top 15 dividend egg has cracked on a Persian policy….. just the 60,000 transactions amounting to $250 billion handled by your friendly Tehran teller, Standard Chartered!

Banks, Telecoms and Energy/Resources are the out-sized bets inherent in most UK equities income strategies.  Note WealthiFi’s use of “bets” and “out-sized”.   If certain big equities look cheap/high yield versus bonds there might be a few very good reasons and betting is not an income strategy!

 

Income

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