You could be forgiven for thinking income investing is facing something of an image crisis. In today’s world of stonks and NFTs, there is more than enough out there to make “traditional” income investing look very boring indeed.
The flows data certainly bears this out. As my colleague Sunniva Kolostyak explores this week, UK income funds may not be suffering the £2 billion-plus outflows they suffered in January last year, but the numbers still do not look good for this unloved strategy (see graph below).
But this is more than an image crisis. There are practical reasons for the outflows.
Certainty levels have plummeted. After the drama of last year’s dividend crisis too, DIY investors are sensible to assume there is no such thing as a “safe” dividend, despite what their fund managers may say.
And, speaking of fund managers, fund houses have their work cut out for them. One fund house (Ninety One) this week noted in its 2022 outlook how important COP26 was.
For what it’s worth, I don’t personally think the conference achieved as much as it could have, but it grabbed our attentions in ways previous climate conferences could only have dreamed of.
On one level, this represents what my colleague James Gard calls a “serious problem” for fund groups for years dependent on oil stocks for income. In that sense, “income” risks becoming a dirty word, and rightly so to some degree.
At an individual level, DIY investors may still be content to stay to the end of this particular party, but in the scrutiny-rich world we live in, it is an untenable position for fund house goliaths desperate to convince the public of their wholesomeness.
If you are a DIY investor less bothered by this stuff, then, you may find yourself tempted to invest directly in stocks, whatever the moral implications.
And then there is the issue that, in a world of zero or negative bond yields, people are doing that anyway. There are plenty of reasons to do so, not least inflation, whose pressures could result in increased risk taking on the part of DIY investors desperate to make the system work for them. As James Gard explored this week, cash is not exactly king. But whether it’s stocks, crypto or bonds, risk is still risk.
To me, this looks like a bit of a pressure cooker. But there is one way out of the bind that immediately springs to mind: income funds. Here are three reasons why.
In a world full of cheap money, income investing matters not just because of inflation and the need for yield, but because it prompts companies to maintain what the sceptical-of-neoliberal-solutions bit of me would term "capital discipline."
Not everything comes easily, a lesson many dividend payers were reminded of last year. But perhaps it was a healthy lesson for everyone, whether they have one eye on the “G” in ESG or not. It certainly felt like the party was over, for a brief while at least.
Secondly, if you do have one eye on your moral compass, income investing reminds us that all investors matter. Per share, your local postman gets the same dividend as a huge institutional investor or pension fund. That is a good thing.
And finally, all that expensive due diligence done by fund houses to stay ESG- or SFDR-compliant might seem like a box-ticking exercise to DIY income veterans frustrated by their fund managers’ woke insistence on excluding sin stocks, but it represents a phenomenal expenditure of resources on your behalf, which, in a world of fee pressure, reminds you that the bar on "good" fund due diligence is now much higher than it was. Taking advantage of that could be a good idea.
Finally, consider the take of Schroders CEO Peter Harrison, who recently opined that traditional fund managers--as a fundamental idea--were losing value. Why not, then, make use of their new-found expertise where it does exist?
Morningstar’s own analytical firepower is here for you in this regard too [see here]. We are here to divide the leaders from the laggards, and it’s for your benefit. You never know, you might be able to square the circle of income investing and ESG and sleep better.
The editor would like to thank James Gard and Sunniva Kolostyak for their contributions to this piece, which was the result of several discussions over email and Microsoft Teams
