Last year was an “interesting” time to launch a global equity income fund, according to RWC Partners’ Nick Clay, because everyone had forgone the income market.
Income investing took a significant hit during the 2020 pandemic as companies were forced to cut dividends as lockdowns dented their revenues indefinitely, forcing a scramble for liquidity to shore up balance sheets.
Clay (pictured) was able to sit out the majority of this event as he was preparing his global equity income fund for launch at boutique firm RWC Partners following his departure from BNY Mellon in 2020. But what Clay observed during that time was the market effectively giving up on income as dividend cuts and cancellations dominated the sector. 
“All the headlines across the papers over the course of the year were basically giving up on income, ‘the end of quality and income’, all this kind of stuff,” Clay said.
“And I thought that's really interesting because the basis of quality in companies is that you're compounding a number, time and time again. For about the last 120 years it seemed to work perfectly well and I don't quite understand how a pandemic has broken the maths of compounding.”
Still, the manager said that “everyone had given up on dividend income investing”.
“So launching at that point I thought was really advantageous. At a time when everyone was out of favour and at a time where tech stocks are being pushed to the moon, in terms of valuation and weren't very attractive, and the value stocks are starting to ramp very aggressively. And even now I read that the value stocks are now becoming the new momentum stocks they’ve gone up so much,” he continued.
“From the point of view of your starting valuation point, I think it's quite an attractive time.”
In terms of starting again, Clay added that the UK income space in particular has a chance to rebuild itself stronger post-pandemic and eliminate its unsustainable dividend habits.
The UK income market “was the worst hit and certainly led the charge”, according to Clay.
A longstanding hub for dividend-seeking investors, the UK saw some its biggest and highest paying names cut and cancel dividends, leaving the UK income market in a dilapidated state.
“But now you've got an opportunity in the UK for that to be reset to a level that is more sustainable for the future. Something that's more practical. And hopefully, that is the opportunity companies in the UK will take. It remains to be seen if that's the case,” Clay said.
When asked if this was really likely or would UK companies be keen to prove that they could get dividends back to pre-Covid levels, Clay still stated that many companies would need to rebase.
“The oil companies particularly, given what's obviously going on in their business, the pressure of ESG on and their need to change affectively as a business,” he added.
Banks are another sector that Clay thinks are unlikely to returns to their pre-Covid high dividend levels. He thinks the days of a 5 per cent dividend yield are “long gone” as this is ultimately unsustainable.
“Particularly in this environment, I think we are in this low interest rate environment still for a long time. Despite all the inflation talk, it means a 3.5 to 4 per cent dividend yield is probably the most you're going to be able to deliver on a sustainable basis without sacrificing your capital and ultimately your total return.”
Although the income space – and the UK in particular – may be going through a period of change, Clay’s global equity income strategy will not be changing following his move to RWC Partners.
Clay said RWC Global Income was will be operating under the exact same process, philosophy and entire investment team as his former fund did at BNY Mellon.
RWC Global Income can only invest in companies which yield 25 per cent above the world market. Within this 25 per cent, the fund seeks companies with a durable cash flow and an asymmetry in its valuation due to a controversy.
“What this process spits out is effectively quality at a reasonable yield,” Clay said.
He explained that having run the portfolio for 15 years he recognised the specific roll it played in investors’ portfolios - one they would expect it to continue fulfilling at RWC Partners.
“So there's nothing different, literally nothing different and that is deliberate. Because my view is and so are the clients that are coming over, [they] are saying exactly the same as is that they want exactly the same,” he said.
“We were one of their jigsaw pieces in their overall portfolio of managers they invest in and we play a role for them and they want that role to be continued by us.”
The only material change is at a top line level where Clay sees a “different ownership culture”, which he said the income team “felt was necessary that we needed to change.”
“It all centres around that ownership really; being in a firm where we're owned by the employees. It means that the decisions are made totally in alignment with what we our clients require, totally in alignment with support for ourselves,” the manager explained.
“And no other conflicting pressures that have been brought to bear on people so you can get this sort of focus, you get clarity and you get what I would argue, a real business: a business where you retain your profits, and you build that up on your balance sheet. And you're therefore able to build a profitable your business that means that you can suffer difficult times.”
Applying the fund’s process to a recovering market, Clay said that he was focusing on three main areas for opportunities; retail as a play on the consumer trend during reopening economies, mature tech and US REITS.
“It's by having done the process for quite a number of years that we have that knowledge base that we brought with us as well,” Clay added.
“And that's what the client wants to plug back into is that knowledge base. And not someone starting again and trying to do the same thing but without that knowledge base, and therefore having to start from scratch, and probably struggle with the frustrations that this process brings, and therefore different pressures come to boil.
“They just want the same thing that they used to deliver them.”