It certainly makes sense, because you want your dividends to be reliable and ideally you want them to keep coming in above the rate of inflation.
On top of that, the large majority of managers profess they are trying to deliver a good and growing source of income.
But is anyone else slightly baffled by the fact that while you can gain easy access, via a factsheet, to a fund’s total return, its charges, top holdings, manager commentary or even various awards it might have won, you get no insight – apart from a few notable examples – regarding the amount a fund has actually paid out in terms of income over the years?
Surely, given income is such a big theme at the moment with interest rates so low, an ageing population and as so many managers say they are all about dividend growth, it should be an easily obtainable piece of information? I say “easily obtainable” because it can be done – with a lot of work.
As everyone keeps talking about the need for a growing income stream, we attempted to find out – using the income earned tool on FE Analytics– how much funds in the IMA UK Equity Income sector have been able to grow their pay-out over the last seven calendar years.
The results will be highlighted in a series of articles over the coming weeks, but the point was it took a long time to put that information together.
It’s not an issue for us because it is our job to do that sort of thing – without labouring the point it took two of us nearly four hours and then we had to continuously check the figures – but what about private investors?
Firstly, most of them won’t have access to huge pools of data like FE Analytics and, secondly, most just don’t have the time to sieve through a whole sector or even a single fund’s past income growth.
In the absence of this available data, most income investors will rely on yield. I’m not necessarily saying this is a bad thing as yield can be a useful metric, but – as I am constantly reminded by those who are far more qualified than me – it certainly has its pitfalls.
The most important reason why yield is not perfect is because it’s the dividend divided by the unit price, meaning that yields can go up because the price of its units have fallen, not because a fund has paid out more.
On the flipside, a fund’s yield may drop causing investors to sell, but the actual income they are receiving could have increased; it is just because the price of units increased by more.
As Rob Gleeson, head of FE Research, pointed out, a fund with a headline yield of 1 per cent could be offering its investors more income than one with a greater headline yield if it was increasing its pay-out by 10 per cent each year.
This common misconception about yield and income caused Gleeson and the FE Research team to formulate a new method of judging income funds, which first looks at a manager’s ability to maintain or grow their dividend, their ability to protect capital and then finally the fund’s yield.
Gavin Haynes, managing director at Whitechurch, says as income growth is so important, fund groups should make their dividend pay-outs more easily accessible.
“It is certainly something we look at when we analyse funds and it would benefit investors if their dividend histories were better communicated,” Haynes said.
He points out that dividend histories in the investment trust world are very easy to find and there are trusts, such as City of London IT and Bankers, which have grown their dividends in each of the last 47 years.
Closed-ended funds do have an advantage over their open-ended rivals in this respect, however, as they can retain 15 per cent of their annual earnings from good years to help pay their dividends in bad ones.
OEICs and unit trusts, on the other hand, have to pay out everything each year meaning they are at the mercy of the market.
That’s not to say that certain funds don’t publish their annual pay-outs. A good exception to the rule is the five crown-rated Premier Multi-Asset Distribution fund.
It aims to grow its income to investors and the bar chart below, which is lifted from its factsheet, shows how much it has paid out over the years.
Premier Multi Asset Distribution’s dividend history
Simon Evan-Cook, co-manager on the fund, says Premier has always wanted to publish that information and suggests other funds might not do it because this desire for income is a relatively recent phenomenon, and therefore marketing departments are yet to catch up.
However, as a fund of funds manager, he says another reason why so many don’t publish their pay-out information is because funds will band around the idea that they are income funds, but don’t really care how much they are paying out per unit or whether their dividend is growing.Evan-Cook says something has to change.
“I think it is a travesty that, with all these changes to annuities, that the industry isn’t doing more to help investors understand more about income,” Evan-Cook (pictured).
“Without that information, people do focus more on yield and because of that they focus on total return – which is obviously affected by what the price does – and then suddenly you have income investors obsessing over short-term price movements.”
“They could have sold a top-performing income product in early 2009 just because the price has dropped, but in reality they are missing out on income.”
“We always liken it to property. If you own a flat for income and it is paying you £5,000 a year and cost you £100,000, just because its value fell to £80,000, you wouldn’t automatically sell if you have good tenants who are still paying you that £5,000 a year.”
He added: “It just seems that people aren’t like that with income funds, but I think there needs to be a shift in attitudes.”
While Gleeson, on the other hand, agrees that too much emphasis is placed on yield when analysing income funds, he says groups aren’t trying to con their investors by not publishing how much they paid out in dividends per unit.
“I think [they don’t do it] because they historically haven’t. I wouldn’t say it is a conspiracy,” Gleeson said.
“The problem is that the amount of income an investor receives does depend on what price they paid and, as we know, equities can be very volatile. While I don’t particularly like it, the good thing about yield is that it is easily comparable.”
“When you are looking at dividends per unit, it depends on the price, so it isn’t a very good comparator.”
That being said, as there is a push to make the fund management more transparent and as certain funds already publish their pay-outs over the years, shouldn’t more groups take action?
Given that so many managers claim they are trying to grow income for their investors to attract more unit-holders, shouldn’t those investors be able to see if they are walking the walk, rather than talking the talk?
Well, we think they should and it is an issue we will be tackling on FE Trustnet for some time to come.
Rant over.
