The decade between the end of the global financial crisis and the start of the pandemic was extremely tough for those clients with income as a priority.
Bond yields were persistently low, while most of the returns deriving from equities came from stocks in areas such as technology that had little history of paying dividends, creating the scenario whereby allocators choosing an equity income portfolio often had to choose between buying a stock with little scope for capital appreciation but a healthy yield, or else a stock with growth potential but no yield.
The pandemic period ushered in an era of rapidly rising inflation, and then rate rises, which sent bond yields soaring but also enhanced the yield offered on equities.
Vincent McEntegart, who runs the Diversified Monthly Income fund at Aegon Asset Management, says the impact of higher bond yields is that advisers are now able to place a greater emphasis on buying equities with no or little yield, but more growth potential, as the yield requirement can now be achieved via the bond exposure.
He says: “Income investors have had to work hard to capture an attractive level of income ever since the financial crisis. This was exacerbated by the final reduction in rates as central banks loosened policy. Move forward two years and the picture is materially different.
"Markets have been dominated by the twin spectres of inflation and rising interest rates. There have been widespread implications across asset classes but the dramatic reset in bond prices is perhaps the most significant.”
David Jane, multi-asset fund manager at Premier Miton, says the economic and market conditions of the past decade meant that many products that were badged as income were run on a total return basis, as fund managers did not want to operate a fund that appears to perform poorly relative to an index.
The extent of this challenge was illustrated by the Investment Association lowering the hurdle a UK equity fund needed to achieve in order to be eligible for the IA UK Equity Income sector, from 10 per cent above the index, to equal with the index on a rolling three-year period.
That action was prompted by a number of the best-performing, in total return terms, UK equity income funds being unable to hit the previous target.
McEntegart says: “Being less reliant on equities for income offers a chance to reshape that component of the portfolio by geography, industry and theme.”
He adds: “Low average yield from the US equity market is no longer the issue it was. Instead, its growth potential is something that can more readily be tapped. It would have been difficult to own companies like Microsoft (developing artificial intelligence and holding a 49 per cent stake in ChatGPT) and Broadcom (a global leader in semiconductors and infrastructure software) when income was scarce since they yield less than 1 per cent and 2 per cent respectively.”
