Omnis Investment Update : Plugging The Income Gap

Omnis Investment Update : Plugging The Income Gap

19th June 2020

Amid the panic and disruption caused by the coronavirus pandemic, some investors have also had to deal with a loss of income generated by their portfolios.

The coronavirus pandemic has led a number of companies to retain excess profits rather than distribute them to shareholders in the form of dividends. This temporary loss of income may concern investors, especially those who are retired, but retaining profits is in their interests. As we argued in Disappearing Dividends Should Return, preserving cash during times of crisis allows companies to prioritise their financial health when earnings fall and emerge in a position to take full advantage of the recovery.

As Franklin Templeton, manager of our UK All Companies and Small Companies Funds points out:

‘Good quality companies are choosing to pass on dividends. These businesses seem to be taking pre-emptive actions to preserve cash and keep finances healthy. This can be a prudent approach in our view, and possibly the right thing to do given the exceptional market circumstances today’.

The Omnis investment team believes many companies should start paying dividends again soon, an assessment shared by Royal London Asset Management, manager of our UK Equity Income Fund. In a recent note, they told investors:

‘Some companies are cautiously waiting to see how the pandemic develops over the coming months, intending to catch up with greater distributions later in the year. We are confident that the resumption of dividend payments will be swift once a solution, such as a vaccine, is found’.

Where else can investors look for income?

In the meantime, there are other sources of income which could help make up for the shortfall in dividends. Take bonds for example. When you invest in a bond, you effectively lend money to the issuer, typically a government or company, in return for regular interest payments. That makes the asset class popular among income investors.

Bondholders may be concerned by some of the measures launched by central banks to support the global economy and help it recover after lockdown. Many have expanded their bond-buying programmes, known as quantitative easing, which lowers the rate of interest they pay, commonly referred to as yield. However, our bond funds are geographically diversified, meaning they hold assets from all over the world. While the UK Gilt and Sterling Corporate Bond Funds focus on the UK, the others can invest wherever their managers see fit.

The benefits of active management also become evident during periods of market turbulence like we are experiencing at the moment. Our fund managers can sell holdings if they think their yield has fallen too low and replace them with others that deliver a more attractive income. Bonds issued by the German and Japanese governments currently pay a negative yield, so they account for a relatively small proportion of our Strategic Bond Fund. The fund has a larger allocation to higher-paying Italian government bonds.  

Some of the Omnis funds, including the Sterling Corporate Bond Fund, hold bonds issued by companies. Corporate bonds tend to pay a higher yield than government bonds because they are considered riskier. However, the Omnis funds typically hold higher quality ‘investment grade’ bonds that are less likely to default. It is also worth noting that while companies can cancel dividends, they do not have the same flexibility with interest payments. 

Columbia Threadneedle, manager of our Sterling Corporate Bond Fund, has been adding corporate bonds to their portfolios throughout the current crisis. They have reduced risk by focusing on well-established, financially sound companies in sectors including technology, utilities (energy and water providers) and beverages.

Alternative sources of income

Our multi-asset funds provide another source of income for investors that could make up for the loss of some dividends. They tend to steer clear of some traditional ‘alternative investments’ such as property in favour of other asset classes.

Paul Flood of Newton Investment Management, who runs our Multi-Asset Income Fund, told us:

‘Whilst we have had some dividend cuts within the equity portfolio, we have also had income growth from many of the alternatives within the portfolio, which has helped reduce the impact of the dividend cuts. Given our focus on income, we believe we have held up reasonably well even in these extraordinary circumstances. This is due to our large exposure to renewables and infrastructure which have held their dividends steady’.

The message to investors, especially those who rely on their portfolio for an income, is that this should prove to be a temporary loss of some dividend income. We believe companies will start paying them again once the global economy recovers. We stay in constant contact with our fund managers, and we will continue to monitor how they adapt to the current market conditions.

 

Toni Meadows

Chief Investment Officer, Omnis Investments Limited

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Issued by Omnis Investments Limited.  This update reflects Omnis’ view at the time of writing and is subject to change.  The document is for informational purposes only and is not investment advice. We recommend you discuss any investment decisions with your financial adviser. Omnis is unable to provide investment advice. Every effort is made to ensure the accuracy of the information but no assurance or warranties are given.

The Omnis Managed Investments ICVC and the Omnis Portfolio Investments ICVC are authorised Investment Companies with Variable Capital. The authorised corporate director of the Omnis Managed Investments ICVC and the Omnis Portfolio Investments ICVC is Omnis Investments Limited (Registered Address: Washington House, Lydiard Fields, Swindon, SN5 8UB) which is authorised and regulated by the Financial Conduct Authority.