FSA Guide to the Art of Income Investing - HK Version 2016 | Page 6

OVERVIEW

The challenges of income investing

THE SEARCH FOR
RELIABLE INCOME
Income producing assets are found in more jurisdictions and in a wider range
of securities than ever before. With so much choice available, fund managers
need to focus on the reliability of the income and scour the marketplace with a
discerning eye for quality.

F

or anyone seeking an income from
their investments the years since
the financial crash have proved to
be difficult ones. Record low interest
rates, falling bond yields and a growing
trend among major corporates for
either cutting or suspending dividends
have all meant one thing: generating
solid, low-risk income has become
much harder to do.
While the US Federal Reserve began
raising rates for the first time in almost
a decade at the end of 2015, at 0.5 % the
federal funds rate remains interminably
low, with corporate America not likely
to come to the income investor’s rescue.
Andrew Harvie, a client portfolio
manager within the Columbia
Threadneedle Global Equities
Team, notes that while a number of
US companies are attractive due to
their ability to tap into the growth in
consumer spending, the US tradition
of using spare cash to buy back shares
as opposed to paying out dividends
reduces the attractiveness of such
companies.
“Broadly, we’re looking for
companies that have the ability to
benefit from an increase in consumer
growth,” he explains. “We’re not
looking at high-end retail, but more
mid-market like Victoria’s Secret,
Coca-Cola and McDonald’s, which have
very strong, robust balance sheets with

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(Asia), Columbia Threadneedle and
co-manager of the Threadneedle (Lux)
Developed Asia Growth and Income
Fund, is having a knock-on positive
effect on companies’ ability to return
cash to shareholders.

predictable revenue streams.”However,
he adds: “We like the US, but we tend to
be structurally underweight on the US
because of buybacks.”
On the other side of the Atlantic
interest rates also remain low, with
Bank of England governor Mark Carney
indicating last month that the UK base
rate is unlikely to rise in mid-2016 as
previously expected and could in fact
remain at 0.5% until the end of this year
or even into 2017.
Unlike in America, though, UK
companies have a long tradition of
paying out dividends, meaning that
while the likes of FTSE 100 constituents
Centrica, Glencore, Rolls-Royce and
Standard Chartered have all slashed
their payments in the past year there
is still income of some description to be
found.
“The UK has a culture that has
dividend pay-outs embedded in its
corporate culture,” says Harvie. “If
you’re talking about going from 8% to
5%, we can live with that.”While capital
expenditure has been an issue over the
past few years, with companies able
to take advantage of low interest rates
to fund their expansion only to find
themselves cash constrained when it
comes to paying dividends, the threat of
another global recession has led some
to scale back their ambitions. This, says
Soo Nam Ng, Head of Asian Equities

Margaret Taylor
Contributing
Editor,
Fund Selector
Asia

Matthew Driskill
Contributing
Editor,
Fund Selector
Asia

“In this environment, where growth
is slowing, a lot of companies are
becoming circumspect on how fast
their business can grow and how much
they want to deploy their funds,” he
says. “People now are focusing less on
expansion and even though earnings
may be muted cashflow is improving,
which means the ability to pay
dividends is also improving.”
In Asia-Pacific the picture is mixed,
with Ng pointing to Australia and
Singapore as jurisdictions that offer
income-paying securities while in Hong
Kong dividends remain hard to come by.
“Australia and Singapore are
tightly regulated markets and we
like the big four banks in Australia

MSCI World REITS vs MSCI World High Dividend
3 Year %
35%

20%

5%

28/2/13

31/10/13

30/6/14

28/2/15

31/10/15

-10%

Index : MSCI World High Dividend Yield GTR

Index : MSCI World/REITS GTR

Fund Selector Asia Guide to the Art of Income Investing March 2016 www.fundselectorasia.com