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Industry Insights Series Q2 2020
Gerry Caley, Senior Partner
In recent blogs we have highlighted the importance of having financially strong companies in our fund portfolios. These are companies with good reserves and adequate dividend cover. We also discussed the importance of portfolio diversification. But what happens when the markets are affected by a global event such as Covid-19? How do we help to safeguard a regular income stream for clients who rely on it?
One of the ways we achieve this is to ensure that a portfolio is not wholly reliant on UK Equity Income funds to provide the dividend distribution (yield). UK stocks tend to generate higher returns than countries such as the US, however there are other areas of the world that also generate high yields in comparison. For example, companies in the Asia Pacific region are well positioned to take up some of the shortfall we may suffer in the UK.
Back in the late 90’s several booming economies in Southeast Asia, known as ‘tiger economies’, suffered badly and market recovery was slow. There was little formal legislation around dividends at the time, but afterwards we witnessed a gradual culture change across the regions. Many CEO’s and boards began to adopt a more proactive approach to paying dividends. There was improved governance over business processes in the interest of the external shareholders, and over time this resulted in increased trust of these Asian companies with the outcome being increased investment from external shareholders – many being UK based fund managers.
Today, the Asia Pacific region is home to roughly two thirds of the world’s population. Although the trend is towards an ageing population in some parts, a large working-age population underpins the growing economies. This also brings rapidly increasing wealth, and today this region probably has more high net worth individuals than any other. All of this helps to maintain good GDP growth, which outstrips the western countries.
Whilst the Asia Pacific region was the first to be affected by Covid-19, it is not by luck that they emerged first or more quickly than other countries or regions. They were generally quick to contain the virus and quicker to reopen their economies, therefore suffering less economic damage. Although their dividends will be affected, it appears likely that they will be reduced to a lesser degree – approximately 25% compared to 50% in the UK, or in the case of banks, no reduction at all.
In terms of our portfolios, we always have a percentage of good growth funds - even if we are building an income stream. Some of these funds will probably pay a small dividend of around 1-3% which is helpful, but we would mainly be looking for capital growth. This allows us to maintain the necessary capital and provide the extra income. Additionally, by running our client portfolios on a suitable platform, we can shave profits off better performing growth funds to top up the cash account, thereby funding the distribution.
And so, by combining our knowledge of building flexible portfolios with the strong relationships we build and maintain with a wide range of investment houses and fund managers, we are better able to service the needs of our clients.
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