Choppier waters sailed in quest for high returns

WITH the UK equity income sector underperforming over recent times, equity funds have struggled to attract the same interest as fixed income funds. However, with the base rate so low, investors are increasingly leaving the safe waters of bond based fixed income funds in favour of the choppier waters of equity income funds, lured by the sirens of higher returns.

According to Gemma Godfrey of Credo personal wealth management, “We are seeing very limited upside potential in the bond markets, with bond spreads 70 per cent below the peaks that we saw in 2008, investors are having to look farther afield in the bond market in order to see the same returns as those available in equities, to emerging market debt for example. However, the risk involved does not offer any real draw over equities.”

Andreas Utermann, global CIO at RCM, a company of Allianz Global Investors, underlined this sentiment: “The risk-return tradeoff for equities appears much more positive than that for government bonds. We have maintained our underweight position in government bonds of any duration longer than two or three years as we feel that the risk of a secular setback is very significant.”

“With interest rates in the OECD continuing to provide no protection for future inflation, and property either depressed or, as are commodities, in potential bubble territory, equities would appear the only game in town.”

From a pension fund perspective, Lee Robertson, CEO of Investment Quorum, a boutique wealth management firm, says that things are not so cut and dry: “While in their client portfolio there has certainly been a move away from fixed income funds, that is not to say that they have been abandoned altogether. It is more that there has been a move away from government bonds and gilts in favour of higher-yielding bonds such as Tesco, for example.”

The flow into UK equities had been slowed recently by a depression of dividend payment figures on the back of the BP disaster. The fallout of the events in the gulf dented dividends by £5.4bn with BP accounting for almost one tenth of all UK dividends. However Capita Registrars, which publishes the UK Dividend Monitor, says it expects total dividends paid in 2011 to rise by 9 per cent from £56.5bn to £59.6bn.

Charles Cryer, chief executive of Capita Registrars said: “2010 finally saw a very broad based recovery in dividends – the vast majority of companies and sectors returned more to shareholders, as the need to hoard cash in the face of tight credit and a weak economy receded. Even though share prices have rebounded, the income on equities is still looking very attractive, far ahead of bonds and cash. After a really tough two years, income investors can look forward to a much better year for dividends in 2011.”

A potential third route for those seeking an income from their investments comes in the form of a number of new overseas equity income funds. However, in the short term, Andreas Utermann at Allianz Global Investors favours developed economies over casting the net wider, expecting that some of the capital that has flowed into emerging markets over the past 12 months as a result of quantitative easing will start flowing back into western economies.

As with all things current in the financial sector, dividends from companies in your portfolio with exposure to the Middle East may take a hit, but with this whirlpool of risk navigated, 2011 may well see investors sailing into the safety of healthy income on their funds.