Buy equity income before it’s too late, says Hambidge
Equities are the place to be for income investors, but the current window of opportunity won’t last forever.
Income-seeking investors should get into equities now before the value is squeezed out of them, according toDavid Hambidge
), investment director, pooled funds, at Premier Asset Management.
Hambidge says that bar a few unusual investments in the alternatives sector, equities are the only game in town for income, but with the stampede of investors into income-paying stocks the value will be squeezed out in the medium-term.
To really do well in this environment investors need to focus on unfashionable, unloved equity sectors like Europe, he explains.
“I would urge investors to buy the equity market for income; now is a good time to buy. Don’t wait for certainty: the last time things were certain was July 2007, and we all know what happened then.”
“You are going to see assets becoming more expensive in the income space, which for an investor getting in now is good, but in the medium term the risk is too much money going into those assets driving the prices up,” he said.
“Europe is attractive now from an income perspective. There are more buyers than sellers for obvious reasons. Investors need to get in now to benefit from the high yields on offer in certain stocks.”
Hambidge runs Premier’s range of multimanager funds, and he picks Ignis Argonaut European Income
and European Enhanced Income
as European funds he admires.
Ignis Argonaut European Income has a historic yield of 6 per cent and the Enhanced Income fund 7 per cent. Hambidge says he also looks for UK funds with exposure to the continent while strictly avoiding all euro exposure.
Premier Multi-Asset Distribution
and Premier Multi-Asset High Income
both have five FE crowns, and have each returned over 30 per cent to investors over three years. Both currently distribute a yield of just over 5 per cent to investors.
Performance of funds vs sector over 3yrs
Source: FE Analytics
The UK market is presenting a window of opportunity for income-seekers, Hambidge explains.
“Equity income will outperform equity growth over the next few years. 2012 is going to be a record year for dividends, and dividend growth will slow but still be positive in the future.”
“The risk you are taking in buying now is that the market goes down 20 per cent and therefore you bought too early and should have waited, but you can’t wait for certainty.”
To diversify Premier is also looking to infrastructure investments, including yields on Private Finance Initiative (PFI) contracts, and to commercial property.
Hambidge says that in the medium term the stampede into income-paying stocks will make diversification more difficult, and at that point he may start to look at derivatives.
He is suspicious of the recent fashion for emerging market-focussed income funds.
“If you want to flog products, it's EM that gets investors’ juices going the most,” he said.
“I’m not saying it’s a bad place for income - we do have some exposure to Asia for income - but you do not necessarily need to be there.”
“Dividends might be more earnings-sensitive in EM, and as an investor you don’t want your income to be volatile if you’re living off it.”
Hambidge says investors should be prepared for a good few years of poor economic performance and distribute their money accordingly.
“We have had a decade of borrowing-based GDP growth and now it’s payback time; we’re going to have low growth for a long time,” he finished.