Whilst there has been a broad fall in the yields that can be found in the market, the growth of global equity income as an asset class has been significant, according to BMO Global Asset Management’s Gary Potter and Anthony Willis.
Potter and Willis, who are part of BMO GAM’s multi-asset team, said the changes seen in the markets over the past 10 years have led to a shift in the asset allocation process in order to bridge the income gap, as traditional asset classes are no longer delivering the required level of yield.
At the same time, the yields from global equities have improved, the pair noted.
“In order to maintain yield we’ve had to increase our search elsewhere,” said Gary Potter, co-head of the multi-manager team. “Had we just stayed with the weighting in fixed income that we have, we would have necessarily had to move all our fixed income portfolio into high yield or junk bonds, and that is exactly what we don’t want to do.
“But we have seen a real growth in global equity income,” Anthony Willis pointed out. “Globally, it is worth noting dividends back in 2009 were $700bn whilst now dividends are $1.25trn.
“We are now holding equity income funds across North America, Asia, emerging markets and Japan,” the investment manager added.
Indeed, there has been a rise in the number of global equity income fund, from 14 a decade ago to 44 in 2018 -as regions and countries outside the UK have begun paying more out in dividends.
“You are getting as much income from Asian equities as from UK equities now," noted Potter.
As such, Potter said its BMO GAM MM Navigator Distribution has become more globally-focused, as the below chart shows.
Income breakdown of fund
Source: BMO Global Asset Management
While fixed income has become increasingly less attractive in the low-rate environment, Potter and Willis noted that some alternative assets have become more appealing, although they have focused on robust strategies with the ability to generate income as well as capital growth.
“In 2007 we had a traditional portfolio mix with 4.5 per cent yield delivered through natural income,” said Potter.
“However, in 2018 we have introduced a number of different alternative assets, including GCP Student Living and GCP Infrastructure.
“Neither of these funds [GCP Student Living and GCP Infrastructure] were there when the fund was launched but they have come in to the portfolio and have done a very fine job both on the capital and particular in the income side, so we have had to adapt and evolve this portfolio but maintaining the initial approach,” said Potter.
The five FE Crown-rated £1.1bn GCP Infrastructure Investments is an investment trust that focuses on the debt issued by UK infrastructure project companies, typically investing in completed infrastructure projects with long-term, public sector-backed, availability-based revenues.
Meanwhile, the £557.6m GCP Student Living invests in private student residential accommodation and commercial facilities located primarily around London. It was the first real estate investment trust focused on student accommodation admitted to trading on the London Stock Exchange.
Performance of funds over 3yrs
Source: FE Analytics
When it comes to portfolio construction and as we approach the end of the cycle the pair agreed stock, sector, and country selection will be crucially important going forward.
“Moving forward we don’t think we will need to take too much risk to find superior yield,” Willis said. “Diversification is key as we don’t want all our income from the same source and we want to understand different funds do different things at different times.”
Given valuations are relatively unattractive at this stage of the cycle, the investment manager said they will probably have to find further drivers to "push things higher" and noted they continue to be UK neutral, underweight US and underweight fixed income.
Commercial property and absolute return funds are areas where the team continues to find opportunities.
Willis said: “We have seen US equities lead global equities and we are not completely sure momentum will last. With regards to the UK, we have moved to neutral having been underweight for some time.
“We get the impression there are really good stockpicking opportunities in the domestic market.”
He added: “We are the highest yielding fund, we guarantee £51,371 of natural income – not eating into the capital- paid out for a £100,000 investment. So, when markets are very strong, as they were in 2017, this fund will lag a little bit."
However, as markets have become a bit choppier the fund is now back to top-quartile with the fund performing consistently and robustly, the investment manager pointed out.
Over 10 years, F&C MM Navigator Distribution has delivered an 81.42 per cent total return compared with a 58.23 per cent gain for the average fund in the IA Mixed Investment 20-60% Shares.
Performance of fund vs sector over 10yrs
Source: FE Analytics
The fund has an ongoing charges figure (OCF) of 1.49 per cent and yields 4.6 per cent.