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  1. Casting the
    net wider

    Why income diversification pays time after time

    Paul Roberts, Baillie Gifford Multi Asset Income
  2. July 2020

    All investment strategies have the potential for profit and loss, your or your clients’ capital may be at risk. Past performance is not a guide to future returns.

  3. The Great Depression. The Great Financial Crisis. The current Great Dividend Crisis: Enduring financial earthquakes is far from easy but, they serve as ‘great’ learning opportunities. Paul Roberts explains how a multi-asset approach can provide resilient long-term income in times of upheaval.

    The decimation of dividends for income investors is just one example of how the coronavirus (Covid-19) has impacted our lives. We still don’t know when normal life will resume. There may be more stress to come in financial markets but for now, at least, stock markets have shaken off the worst. One thing, however, is already clear – those investing for income may never think the same again.

    Amongst the many negatives, the crisis has yielded some useful lessons, ones that will reverberate far beyond tomorrow.

    Lesson #1 – Think long-term income, not short-term yield

    James Dow, joint-head of Baillie Gifford’s equity income strategies, recently wrote on the unprecedented nature of  the pandemic plight (‘The Great Dividend Crisis’, April 2020). In short – although dividends have been decimated, the worst thing to do is try to ‘plug the income gap’. 

    Faced with a big hole in current income the temptation for many income investors will be to pick up a bargain – one of those companies still expected to pay a generous dividend and trading with a temptingly high yield. But this is one reason we are where we are today. Many of the companies filling equity income portfolios, the darling dividend payers, already faced challenging futures before Covid-19 struck: High street retail was under pressure from ecommerce; oil companies were dealing with a low-carbon future; banks were enjoying an unusually long period of near-zero loan losses. Many of today’s high-yielders face permanently impaired earnings. This will not only impact their dividend-paying ability for years to come but will also supress their capital values. Tomorrow’s capital pays tomorrow’s income and a permanent loss of capital is a real risk.

    The answer is to accept a lower yield today but invest in resilient and growing companies. That way, the lower level of starting income will also grow, maximising long-term income.



    Lesson #2 – Go global

    UK equity income funds form a core part of many investors’ portfolios due to historically attractive yields. But this market has been badly hit in this crisis. When Imperial Brands, the tobacco company held substantially in many income portfolios, announced a dividend cut in mid-May it took the total income lost this year from the UK stock market above £30bn. At time of writing around 40 per cent of companies in the FTSE 100 had cancelled or reduced this year’s dividend pay-out.

    Looking to a global opportunity set is not just about geographic diversification, although that certainly has merit. It is also about looking to the future. There are around 250 dividend-paying companies in the UK, and many operate in structurally challenged industries. Worldwide, about 4,500 companies form the dividend-paying universe. There are many great companies with strong business models that will remain relevant for many years. We have found going global to be incredibly liberating and rewarding. This is a time of real opportunity to invest in great companies and build income for the future.

    Lesson #3 – Make the most of diversification

    We believe equities have a valuable role in an income-generating portfolio. Most notably they have the ability to provide inflation-beating growth, in income and capital. For many investors however, equities will not be the whole solution. Combining equities with other assets can provide a higher level of income today, with less volatility. The most effective way to achieve attractive and resilient income is to widen the opportunity set and use a multi-asset approach.

    There’s nothing new about the notion that assets other than equities might provide a useful source of income. Bonds, after all, have traditionally been the starting point for an income-seeking portfolio. But with bond yields collapsing over the past few years, investors have been presented with the unappealing option of investing in securities providing ‘return-free risk’. With low levels of income on offer, any return to more normal levels of yield would also result in capital losses.

    So where should we be looking? Well, not all bonds are created equal. While developed market government bond yields have converged to zero – and even turned negative – emerging markets continue to provide attractive levels of yield: around 6 per cent in aggregate. Yes, they carry more risk,  but for experienced managers who can sort the stronger developing economies from the basket-cases, they can form a valuable part of an income-focused portfolio.

    The story is similar when considering corporate bonds. During the recent crisis, yields on higher risk bonds rose dramatically. Many investors are rightly worried about a rise in defaults, which would wipe out income and capital. However, as is often the case, some excellent companies with solid prospects saw their bond prices fall heavily. We see opportunities amid the chaos.

    Looking still further afield, real assets such as infrastructure and property have fantastic qualities for income portfolios. Typically, they provide high levels of income that rise with inflation over time. However, they are not always a panacea for income resilience, so care is required. Parts of the property market face many challenges at present, notably retail. A number of property companies have already announced dividend cuts, faced with a rapidly rising number of tenants unable to pay rents. It’s important to be able to select from a global diversified universe. Infrastructure, meanwhile, tends to provide excellent diversification benefits. Cash flows can be linked to long-term contracts underpinning schools and hospitals for example, assets not influenced by the economic cycle. Or regulated utilities where prices are tightly controlled, and companies are allowed to generate a steady return, typically distributed as income to their investors.



    The Great Opportunity

    We see a great opportunity to invest for the future in Multi Asset Income – a strategy that delivers an attractive and resilient income stream, while preserving the real value of both income and capital over the long term.

    Active management is vital to achieving those aims. It’s important to look beyond indices and pick companies whose dividends or bond yields are more resilient. A wide opportunity set also allows freedom for active asset allocation. Active management fully earns its stripes when markets get choppy, as the key to providing a resilient long-term income stream is the careful and timely allocation of capital. We look ahead with optimism. ‘Great’ should be applied to the scale of the opportunity, not just to the crisis itself.   

  4. Actual Investors
    Look to the future.

    Not the past.

  5. Important Information and Risk Warnings

    The views expressed in this article are those of Paul Roberts and should not be considered as advice or a recommendation to buy, sell or hold a particular investment. They reflect personal opinion and should not be taken as statements of fact nor should any reliance be placed on them when making investment decisions. This communication was produced and approved in July 2020 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.

    This article does not constitute, and is not subject to the protections afforded to, independent research. Baillie Gifford and its staff may have dealt in the investments concerned. Investment markets can go down as well as up and market conditions can change rapidly.

    The value of an investment in the fund, and any income from it, can fall as well as rise and investors may not get back the amount invested.  The fund has exposure to foreign currencies and changes in the rates of exchange will cause the value of any investment, and income from it, to fall as well as rise and you may not get back the amount invested. The fund invests in emerging markets where difficulties in dealing, settlement and custody could arise, resulting in a negative impact on the value of your investment.

    Derivatives may be used to obtain, increase or reduce exposure to assets and may result in the fund being leveraged. This may result in greater movements (down or up) in the price of shares in the fund. It is not our intention that the use of derivatives will significantly alter the overall risk profile of the fund.

    Bonds issued by companies and governments may be adversely affected by changes in interest rates, expectations of inflation and a decline in the creditworthiness of the bond issuer. The issuers of bonds in which the fund invests, particularly in emerging markets, may not be able to pay the bond income as promised or could fail to repay the capital amount.

    This information has been issued and approved by Baillie Gifford & Co Limited. Baillie Gifford & Co and Baillie Gifford & Co Limited are authorised and regulated by the Financial Conduct Authority. Baillie Gifford & Co Limited is an Authorised Corporate Director of OEICs. All information is sourced from Baillie Gifford & Co and is current unless otherwise stated.


    Annual past performance to 30 June each year (%)

      2016 2017 2018 2019 2020
    Multi Asset income Fund (B Inc) n/a n/a n/a 9.3 0.2
    Investment Association Flexible Investment Sector n/a n/a n/a 14.0 0.3

    Performance source: FE, total return in sterling. Returns reflect the annual charges but excludes any initial charge paid.

    Please note as the funds launch date was 31 August 2018, full historic performance is not available.

    The manager believes an appropriate performance comparison for this fund is the Investment Association Flexible Investment Sector.

    Past performance is not a guide to future returns.


    The images used in this article are for illustrative purposes only.


    48094 INT AR 0203