Equity income managers look to bonds

Equity income managers are looking to bonds to generate yield in place of the shortfall from banks, according to research from Standard & Poor’s.

The fund services arm of the ratings agency has released its latest sector update, showing that some income managers have struggled to meet their yield target now that many banks are not paying dividends.

Alison Cratchley, S&P Fund Services’ lead analyst, says Old Mutual’s Michael Gifford is one manager who has moved into bonds to increase yield. He has put 5% of the Old Mutual Equity Income fund into fixed interest.

However, some managers believe that the opportunities in equities are sufficient, Cratchley says.

Nick McLeod-Clarke, the manager of BlackRock UK Income, says the market fall has brought many traditionally low-yielding companies such as BHP Billiton into the income universe. The weakness of sterling has also helped, since many of Britain’s largest companies declare their dividends in dollars, he says.

Elsewhere in the equity income peer group, managers such as Neil Woodford have tried to remain defensive by increasing their exposure to robust large-cap companies.

Cratchley says that Woodford continues to hold a bearish macroeconomic view and expects the deleveraging of the banking system and the consumer economy to take years, making the recession more prolonged than the market expects.

Brian Gallagher, the manager of the UBS UK Equity Income fund, sees the economy still in the early stages of recession, with considerable risk to corporate earnings. Although he says valuations look attractive and there may be a series of short, sharp rallies during 2009, Gallagher does not expect a sustained recovery in the market until the fourth quarter of this year and first quarter of 2010.

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