As the economic horizon darkens, investors are going to need to pay close attention to the asset classes – and individual holdings – they populate their portfolios with; careful bond selection is just one element of this.
This month’s expert wealth managers delve into “Dividend Aristocrats”, the nuances of bond selection and the merits of sometimes taking profits so one can have cash ready to deploy.
Year-to-date figures indicate that “Dividend Aristocrat” funds may be finally coming into their own
A case is made for credit having the potential to outperform equities, as long as bond selection is diligent
One expert explains how taking profits, then watching and waiting for bargain-hunting opportunities can work
About a decade ago, there was a flurry of launches in grandly named “Dividend Aristocrat” ETFs and Index funds. These blue-blooded funds allocated capital only to stocks which had maintained and grown their dividends over a 15-year period or more, looking for outperformance in true long-term quality.
So much for the theory; the practice has been much less exciting. In the 10 years to the 31 July, the US Dividend Aristocrats Index delivered returns of +208% vs the wider market (S&P 500) +261%, and the UK Dividend Aristocrats Index has lagged by about 40% over the decade. Both US and UK Aristos suffered in the pandemic, falling at least as much as the wider indices, so providing scant protection in declining markets.
Both US and UK Aristos suffered in the pandemic, falling at least as much as the wider indices, so providing scant protection in declining markets
Roll on 2022, and perhaps their time has finally come: both have preserved capital this year. The US Aristocrats is up +1.3% in US Dollar terms versus the S&P down -11.0% (at the time of writing, 25 August 2022), and the UK index has held its own too. The attraction of quality franchises and, crucially, the lack of cyclical and flighty technology companies has won the hearts of investors on both sides of the pond.
As ever with index funds, you need to understand what you own, but the snooty Aristos maybe worth re-visiting.
Private Clients Investment Director
Markets have a tendency to exaggerate. Earlier this year, it seemed as if the slump would never end, whilst in the last couple of months (and even last week) equities have turned massively bullish. Neither view is correct. This week’s US CPI shows that defeating inflation will be hard, that the Fed will keep interest rates higher for longer and that equity earnings will get revised down as a result – but even this presents potential opportunities.
We may be closer to the peak in monetary policy. We may see 4%+ in Fed funds by year-end or early 2023. Bond markets are already positioning for that scenario. This is an environment where credit can perform better than equities. If we go into a slowdown rather than a full recession, diligent bond selection could help avoid defaults whilst cashing high coupons in portfolios. US treasuries are also looking more attractive. Gilts, however, may still require some caution, especially in light of the new PM’s tax-cut and spend policy.
We may be closer to the peak in monetary policy. We may see 4%+ in Fed funds by year-end or early 2023. Bond markets are already positioning for that scenario. This is an environment where credit can perform better than equities
Equities once again will depend on the sectors and markets. Poor inflation data will act as a headwind for long duration shares, notably technology, until the Fed truly changes direction. On the other hand, the leaders this year (energy and utilities) are likely to retain their mantle and a few other defensive sectors may well help too. Geographically, we still find Asia better value than the US or Europe, but retain a soft spot for the some of the largest stocks in the UK market, as they tick our sector boxes.
Chief Investment Officer at Canaccord Genuity Wealth Management
As this month’s experts emphasise, there is a whole investment universe out there to explore and outperformance is still very much possible despite the prospect of an economic slowdown (or even full-blown global recession).
Seeking out true quality is, however, no easy task when there are so many asset classes, sectors, markets and types of individual security to consider. If you would like a health check for your portfolio and/or a conversation about the growth opportunities still open to you, why not let us arrange some no-obligation discussions with the leading wealth managers on our panel?
We warned last month about bear market equity rallies. In July America’s S&P 500 had risen 9%. At some point the markets will see a sustained recovery but with so much uncertainty around we did not feel this Summer was that turning point. We took some profits. It was good we did. In the past month the S&P 500 is down almost 9%.
We put the proceeds of our sale of equities into cash. With inflation in double digits that is something you do with some trepidation, but it highlights the value of cash in volatile times. When markets whipsaw as sharply as they have done, cash available to use nimbly in exploiting any tumbles can generate attractive returns.
Rising interest rates, the war in Ukraine and, of course, the cost-of-living crisis, which is affecting us all, means analysts’ earnings forecasts could fall more sharply in the months ahead
Rising interest rates, the war in Ukraine and, of course, the cost-of-living crisis, which is affecting us all, means analysts’ earnings forecasts could fall more sharply in the months ahead. This means we need to take more care with valuations of the stocks we buy.
We have not changed overall allocations to bonds but have adjusted the composition of our holdings. We have reduced inflation-linked bond exposure in the UK and invested the proceeds in conventional bonds. This is another small step in extending the duration of bond holdings, which we will continue as opportunities present themselves.
Partner and Portfolio Manager at James Hambro & Partners
The investment strategy and financial planning explanations of this piece are for informational purposes only, may represent only one view, and are not intended in any way as financial or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
We always advise consultation with a professional before making any investment and financial planning decisions.
Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.