The long-term effects of the Covid-19 crisis are likely to spill into the investment world. After a 10-year bull run in which investors rarely saw a blip in the stock market and enjoyed reliable growing dividends, things are set to change.
We spoke to three fund managers about how they expect investing to be different in the future:
Dividends Will Be Lower
Income investors have been dealt blow after blow in recent weeks as a raft of businesses have slashed their dividend payments. And if you were hoping for a return to normal in the near future, you may be disappointed.
Alan Custis, manager of the Lazard UK Omega fund, says: “The UK has been renowned for having a very generous dividend yield versus other markets and I think companies had got into a pattern of almost over-distributing. This may set a new base line for them.”
Indeed, in recent weeks some of the biggest dividend payers on the FTSE have slashed or even suspended their payouts to shareholders, including big banks and oil majors. In April, oil giant Shell cut its dividend for the first time since World War II. But Richard Buxton, manager of the Silver-rated Merian UK Alpha fund, agrees a pull back in payouts is not necessarily a bad thing as it could make the economy more stable and dividends more sustainable.
He says: “I applauded the decision of Shell to slash its dividend by two-thirds. After cutting its payout, Shell now yields 3.8%, and if you compare that to bonds or base rate then that’s not bad – I’m actually more interested in adding to my investment in Shell now than I was before.”
Smaller Companies for Income
While British blue-chips are often the first port of call for an income-seeking investor, in the future smaller companies could play a greater role in delivering dividends. Gervais Williams, manager of the Miton UK Smaller Companies fund, says: “The biggest weighting in my income fund is to stocks on the Alternative Investment Market (Aim). These are overlooked, ordinary companies delivering cash in a crisis, and we expect more of it in the future.”
Among the manager’s top holdings are CMC Markets and Kenmare Resources. And while the yields on some of these smaller stocks may be lower than their large-cap counterparts, Williams points out that it is their ability to grow the payout year-on-year that is vital for investors, as a way of ensuring their income grows in line with inflation.
Buxton adds: “If you go right down the market-cap spectrum, you can find some great sources of sustainable dividend growth.” However, he points out that these stocks are not an option for funds with billions of assets under management, as they are not allowed to own more than 10% of any company. “A whole sector has grown to fuel the need for income and many of those funds are too big to access these smaller stocks,” he adds.
IPOs are Overrated
Fewer companies are listing on the stock market these days, for a whole host of reasons. So far this year, just three small-cap stocks have listed on the UK stock market. But these three fund managers are not mourning the loss of new names coming to market. Buxton says: “If you’re going to put money into a company, you’re far more likely to go for one you already know, with an existing business and proven management.”
Custis agrees he’ll be looking out for opportunities in the coming months from established businesses looking to raise money on the stock market. That strategy could be particularly valid at such a volatile time as markets are currently experiencing.
A number of high-profile IPOs in 2019 have notoriously disappointed, including Lyft (LYFT) and Uber (UBER), while WeWork infamously backtracked on its plans to list on the US stock market. Still, Williams is optimistic there could be some new opportunities to come: “I don’t know whether it’s been worth floating for small-caps recently as investors have been so focused on large-cap companies. But I think that could change as investors’ focus shifts.”
ESG Will Be More Important, Not Less
Climate change has shot up the agenda in recent years and investors have increasingly been taking an interest in issues such as how businesses treat their employees or plan to cut carbon emissions. Is a global pandemic and stock market plunge enough to steer that trend off course? Not according to these fund managers.
Williams says the importance of environment, governance and social (ESG) factors can be seen in how companies have reacted to the recent crisis: “I’ve been pleased to see chief executives taking salary cuts, for example; that is absolutely the right thing to do.”
Buxton, meanwhile, points to firms that have been going above and beyond to look after their customers and communities, and making efforts to help NHS workers: “This is an opportunity to reset business’s relationships with society and move away from the attitude of it being all about fat cats and pay.”
