This article is part of Morningstar’s Guide to Income Investing. Whether you are looking grow your pension pot, or invest for retirement income, this week we have all the news, information and education you need.
Emma Wall: Hello and welcome to the Morningstar series, Ask the Expert. I'm Emma Wall and I'm joined today by Kenneth Lamont, Passive Fund Analyst for Morningstar.
Hi Kenneth.
Kenneth Lamont: Hello Emma.
Wall: So we're here today talk about strategic beta, in particular income strategies which are incredibly popular, aren't they? Just how popular are these income strategies?
Lamont: Well, they dominate the strategic beta landscape. You can see the extent of this if you read our latest research, our latest global guide to strategic beta. But just to summarize, they take up more than 50% of the AUM, strategic beta AUM in Europe currently. Of the top 10 most popular funds, they occupy seven of those spaces. So they are very, very popular at the moment.
Wall: And that's no surprise really when you look at the dire straits have been in the U.K. for people looking for yield. It's been more than six years since base rate was dropped to 0.5% and both passive and active strategies, the total income have grown in popularity over that time. Maybe we can help the end investor now by sort of outlining how they can best find an income strategy ETF. You know how they sort the wheat from the chaff?
Lamont: Well, as always when you are looking at passive and active strategies, price would be one of the big – I mean it's one of our five pillars, but it's really something you should look at here. This is one of the most robust indicators that we have a future – future performance of any strategy. So low fees, good.
Wall: Actually in the strategic beta space, there has been some quite high charging funds, haven't there? Compared to sort of simplified ones, so it is the case of making sure you are picking the one that gives you the most bang for your buck, gives you the most return to your pocket?
Lamont: Certainly there is a significant diversity in the fees charged. You may have only 15 basis points for some strategic beta offerings, but these can run up to almost active fund fee levels.
Wall: And once you've done that, what's next on your checklist?
Lamont: Well, as all of these funds screen on basis of yield, and they would look at a cross section of sort of historical yield and select and weight – or weight their constituents based on yield. So you are looking at for a strong performance through time really.
Wall: And is it as simple as just looking at the highest yielding fund or should you be looking at growth of dividends as well?
Lamont: No, I was going to come to this. You sort of scratched the surface a little bit and you delve a bit deeper and you'd want to look at growth of dividends. Many of these strategies do screen their constituents on historical growth. So, firms that have not dropped or let's say the dividends they've given over perhaps a three or five year period.
Wall: So we have got price, we have got yield, we have got growth of dividends, what's the final checklist that one should do before looking an income strategy?
Lamont: The final would be stability. We'd be looking – if you are looking at these products to produce steady income through time, it's very sensible to check that they have done this in the past. And again, some but not all of these funds use fund stability as one of their screening criteria.
Wall: Because as you say, it's very important, especially if you are investing in retirement, where you may not have any other wage other than the income from your investments to make sure that what you think you're investing in is actually what you're investing in, a sustainable income stream.
Lamont: Absolutely yes.
Wall: Kenneth, thank you very much.
Lamont: Thank you, Emma.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
