Adviser focus: Martin Bamford
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“As well as becoming more focused, equity income funds will need to accept lower dividend yields in 2010 and devote more attention to positioning portfolios for future dividend growth.”
Martin Bamford is the managing director of Informed Choice.
Q: British companies cut dividend payments by £10 billion in 2009, according to a report by Capital Registrars. How will equity income funds cope with reduced dividends?
A: Dividend payments could be cut further still in 2010 as companies, particularly in the banking sector, attempt to repair their balance sheets. Across the board, strong dividend growth this year looks very unlikely indeed.
Equity income funds will have to rely on a smaller number of stocks to generate income. The other data published this week by Exchange Data International, showed nearly half of all cash dividends paid out to investors last year came from just five companies.
As well as becoming more focused, equity income funds will need to accept lower dividend yields in 2010 and devote more attention to positioning portfolios for future dividend growth. (article continues below)
Q: Which equity income funds are on your radar? Why?
A: The two equity income funds on our preferred list at present are Schroder Income and Artemis Income. Schroders takes a value approach with their income fund, resulting in the potential for some very attractive capital returns in addition to the income yield. The Artemis fund had a below average year in 2009 but has a strong longer-term track record. It has a large-cap biasand a style which can be modified depending on the position of the economic and stockmarket cycle, which we feel is an attractive attribute.
We are keeping a watching brief on Invesco Perpetual Income fund, as we feel it has potential should the more defensive sectors recover strongly this year. But we have reservations about placing more client money with a manager who is responsible for such colossal amounts of cash.
Q: A wider-than-expected trade deficit, a relatively high unemployment rate and disappointingly low growth rate projection–does recent data dilute hopes that Britain is overcoming its economic lethargy?
A: The GDP figures for the final quarter of 2009 were certainly disappointing and more robust numbers could have resulted in greater confidence in the recovery of the British economy.
“It is important to remember that these figures could still be revised downwards”
It is important to remember that these figures could still be revised downwards and the numbers for the first quarter of this year, when published, could be even more depressing. The recent forecast from the Organisation for Economic Cooperation and Development (OECD) suggests Britain could have a strong recovery ahead.
However, markets and investors will still want to see this backed up with actual figures and real decisive action from government in terms of taking action on the deficit.
Q: What is your stance on British equities?
A: Some profit taking in January was expected after such a strong recovery from the low point last March. Whilst we expect corporate profits to improve in 2010, much of this anticipated rise has already been priced into the market.
Where British companies have exposure to customers in non-British markets, they are likely to fare better than those reliant on the domestic market for their growth this year. We are underweight in British equities, as the risk of further market falls currently outweighs the benefit of participating in another short-term rally.
Q: Which other regions are you currently looking at?
A: Our investment approach means that client money is exposed to a wide range of asset classes at all times, with tactical adjustments made to increase or decrease weighting for short-term advantage.
We are currently tactically quite cautious for all of our models but overweight in Asia ex-Japan equities as we believe this region is driving world economic recovery with some very positive forecasts for 2010.
We remain convinced that there is a good long-term story for emerging markets, although these are currently quite vulnerable for market corrections if economic growth is not sustainable.
Q: What are the most interesting trends in the fund management industry?
A: An increased use of exchange traded funds (ETFs) by fund managers to take tactical positions should mean that funds can be more active without incurring higher costs, in fact, driving down the total expense ratio of funds.
ETFs are becoming increasingly popular for retail investors, although access to ETFs remains the main barrier to their use on platforms and within pension plans.
Longer-term, we expect to see polarisation between passive funds and those actively managed funds with a high active share, which makes the additional cost of active management potentially worthwhile.
