A multi-income journey into the emerging high-yield potential
Income investors like us have stayed the course as we ride through the four seasons. Where do we see income opportunities?
Q1. What are your views on global dividend strategies2,3?
Risk-free rates and cash returns are likely to stay low for an extended period of time as we expect the recovery process from the acute respiratory pandemic’s economic fallout to be gradual.
Seeking low-risk options in income is sensible especially when the global economy has fallen into a recession. But global yields are now down to nearly zero, or negative yielding, coupled with the risk of defaults in some sectors such as high-yield bonds.
G4 central bank key policy rates4
Investments involve risks and are not similar or comparable to deposits.
Interest rates fell to similar levels a decade ago and we saw an increase in demand5 for equity income funds. Now, investors have been looking through the dismal economic data and near-term volatility to focus instead on new and revised monetary and fiscal measures that could provide some support to equity markets.
We believe an equity income strategy with a bias towards quality has the potential to optimise income opportunities in a recovering market.
Q2. Companies are announcing dividend cuts, how are you positioning your global dividend strategy6?
Understandably, company earnings currently are highly impacted by the economic fallout from the acute respiratory pandemic. Although the outbreak is showing signs of abating in some locations, some companies are reducing, or even cancelling, dividends to preserve liquidity within their own business.
We are focusing on long-term forecasting and structural change, and then translating our frameworks and forecasts into valuation rankings. This approach helps us to identify sustainable long-term cash flows and dividend growth.
This analysis allows us to see divergence between regions and sectors. For example, European companies are more likely to be more impacted than those in the US, where many sectors are in better shape with lower leverage than during the Global Financial Crisis.
Our analysts have a strong track record of avoiding investments in companies with dividend cuts. Over the last five years, our portfolio has experienced half of the dividend cuts versus the MSCI All Country World Index (Total Return Net)7 and delivered a higher yield8 at the same time.
8. Yields are not guaranteed, positive yield does not imply positive returns. Past performance is not indicative of current or future results.
Percentage of holdings reducing dividends per share9
The majority of our portfolio is in the US, and exceeding the MSCI All Country World Index (Total Return Net)7. As of May 2020, we do not have any exposure to European banks which has been largely impacted by regulatory scrutiny. Other sectors such as technology, consumer staples, healthcare, utilities and telecommunications have also been relatively insulated in this environment. Some of our existing US holdings have seen dividend increases since the beginning of 2020.
Despite uncertain times, active management can help avoid pitfalls given market’s concerns over dividend cuts.
Q3. What is the portfolio focus now?
Our Strategy has navigated through different market conditions. It’s important to stay focused on the quality of the holdings in the portfolio.
We actively avoid companies facing liquidity events that could cause lasting damage to their business. As such, we have very little exposure to balance-sheet leverage. We have reduced our positions in banks which are highly-likely to be impacted by prolonged low interest rates around the world.
We have a diversified10 exposure and we recently added into our holdings, some high-quality technology and semi-conductor companies that we believe have relatively attractive dividend outlook. We have also taken the opportunity to increase our exposure in some consumer staples companies which were previously overvalued.
Importantly, through the acute respiratory pandemic, our research team has highlighted a range of long term structural trends that could point to some winning opportunities. We construct our dividend portfolios by accessing the full range of preferred structural change themes, such as innovations in healthcare and digitalisation, to seek investment opportunities. Some of these structural shifts in the economy have accelerated as a result of the pandemic.
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Conclusion
The hunt for income is likely to intensify as risk-free rates and cash returns are likely to stay low for an extended period of time. An equity income strategy could help investors, based on their investment objectives and risk appetite, ride out the impact of a recessionary environment and optimise the potential opportunities in a recovering market.
Our Global Dividend Strategy2 seeks to deliver healthy yield premium over the MSCI All Country World Index (Total Return Net)7 through dynamic and flexible positioning to capture opportunities and exposure to structural trends.
This represents investment team’s views as of May 2020 based on current market conditions, subject to change from time to time. Provided for information only, not to be construed as investment or research recommendation.
1. Award won for JPM Global Dividend A (dist) – USD. The Lipper Fund Awards Hong Kong 2019-2020 are issued by Lipper of Refinitiv in the year specified, reflecting performance as at the previous calendar year end. Awards for 2018 or before are named the “Thomson Reuters Lipper Fund Awards Hong Kong/Lipper Hong Kong Fund Awards”, issued by Thomson Reuters. Lipper Fund Awards from Refinitiv, © 2019-2020 Refinitiv. From Thomson Reuters Lipper Awards, © 2017-2018 Thomson Reuters. All rights reserved. Used by permission and protected by the Copyright Laws of the United States. The printing, copying, redistribution, or retransmission of this Content without express written permission is prohibited.
2. For illustrative purposes only based on current market conditions, subject to change from time to time. Not all investments are suitable for all investors. Exact allocation of portfolio depends on each individual’s circumstances and market conditions.
3. We seek to achieve the investment objective, there is no guarantee these will be met.
4. Source: J.P. Morgan Asset Management; FactSet. G4 are the Bank of England, the Bank of Japan (BoJ), the European Central Bank and the US Federal Reserve. *Key deposit rates that central banks charge commercial banks on their excess reserves. **The BoJ has adopted a three-tier system in which a negative interest rate of -0.1% will be applied to the policy rate balance of the aggregate amount of all financial institutions that hold current accounts at the BoJ. Data reflect most recently available as of 31.03.2020.
5. Past performance is not a reliable indicator of current and future results.
6. Holdings, exposures and allocations for actively managed portfolios are subject to change from time to time. These represents International Equity investment team’s views under current market conditions, subject to change from time to time. Provided for information only, not to be construed as investment advice. Diversification does not guarantee investment return and does not eliminate the risk of loss.
7. The index does not include fees or operating expenses and are not available for actual investment.
9. Source: J.P. Morgan Asset Management. Reducing dividend per share refers to dividend reductions in the year of holding (can include removal of specials and the effects of falling earnings and a fixed payout ratio). 2019E = YTD 2019 as of 28.11.2019. Data as of November 2019.
10. Diversification does not guarantee investment return and does not eliminate the risk of loss.
Investment involves risk. Not all investments are suitable for all investors. Past performance is not a reliable indicator of current and future results. Please refer to the offering document(s) for details, including the risk factors. Investors should consult professional advice before investing. Investments are not similar to or comparable with fixed deposits. The opinions and views expressed here are as of the date of this publication, which are subject to change and are not to be taken as or construed as investment advice. Estimates, assumptions and projections are provided for information only and may or may not come to pass. This document has not been reviewed by the SFC. Issued by JPMorgan Funds (Asia) Limited.