"These Are Challenging Times for Income Investors"

VIDEO: Evenlode Global Income fund manager Ben Peters on the search for stable dividends in the crisis and the companies trying to operate as business as usual

Holly Black 29/04/2020 16:27:00
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Holly Black: Welcome to Morningstar. I'm Holly Black with me is Ben Peters, he's Manager of the Evenlode Global Income Fund.

Hello.

Ben Peters: Hi Holly.

Black: So, what is it like to be an income investor at the moment? Obviously, your bread and butter is dividends, and it looks like they're kind of being cast across the board at the moment.

Peters: Yeah, well, it's a very interesting time to be an income investor. And obviously, that's what we're here to talk about. I think the first thing to say is that there are lots of people who are helping us be able to do our job, particularly the frontline health care workers and supply chain staff who are enabling us to sit here and talk about important matters like people saving. So biggest thanks to them. But it is a very interesting and a very challenging time to be an income investor. And I think there are areas of the market where you can find more, more solid and stable income.

If you look at it by sector, then you can see that whether it's in consumer goods, so companies like Nestle and Procter & Gamble. Whereas in healthcare companies like Sanofi and Roche or in IT services, such as Oracle, eBay, helping people to continue to sell things through the crisis. And so, there are areas – companies that are operating sort of more business as usual I suppose, there is no such thing as usual in this environment.

But I think that where incomes are concerned, there are various risks to it through dividend (streams) in the near term, sort of more or less across the market. And that might be because companies are looking to be prudent, where they're seeing potential disruption to cash flow in the short term, and just make sure they get through the crisis in good shape, or because they want to be treating all stakeholders equitably. Shareholders are one stakeholder of course, but in might be suppliers, their customers. So, eBay is a great example where they're waiving fees for all customers to enable them to continue trading on their platform. Or whether its other stakeholders like employees making sure that employees are treated well through the crisis as well. So, you could see risk to dividends anywhere, but there are some businesses that are operating more business as usual.

Black: So, as an equity income fund, you have a target for how much yield you're required to produce to earn that title. And last week, we saw the trade association, The Investment Association, relax that. Does that help to have breathing space for an income investor because there was a concern that you might otherwise have had to ditch funds – ditch investments that have cut their dividends or sort of grasp for riskier ones perhaps?

Peters: Yeah, I think it's a very sensible move. I think the comparing yields between a market and a fund is very challenging at the current time when as you say, dividends are being cut left, right and centre. So, I think it does give appropriate breathing space. And I think the knock-on effects of that is that it gives breathing space for companies, the companies themselves to – if they need to cut or pass or postpone a dividend, which may well be in the long-term interests of shareholders. Of course, nobody wants to see their income stream reducing that's sort of obvious statement. But what's as important really, if we're long term investors is that the total returns that we achieve that the capital values plus the income are good through time and that will only happen if companies make it through the crisis and good companies should make it through in even stronger position after crisis. So that's very important. And I think that The Investment Association’s decision to relax those rules in the near term makes sense.

Black: So, you do have a global remit with this fund. So is there sector or country, you finding areas that do appear to be safer in dividend terms within all of this?

Peters: Yeah, as I say, there are those businesses, I think that the IT sector has been held up as this little archetype for this with Zoom doing very well, but they don't pay dividends. So, there are some more traditional more income type stocks that are being more solid, fundamental performance, and of course, it is free cash flow ultimately, that pays dividends. So that's where we see less risk. But all companies are facing challenges, whether it's in their supply chain or to demand they are seeing, some more challenges particularly way you see the demand side of the equation change more rapidly. So, companies like AB InBev world's largest brewer, about half half of its sales are in the entrees, in pubs and bars and restaurants and things, and that's obviously fundamentally affected by the current situation. So, you can see (indiscernible) sector depending on quite a lot of companies that you are talking about.

Black: And finally, Ben what kind of conversations are you having with company management at the moment? Do they seem fairly confident of their ability to weather this crisis?

Peters: Yeah, I think the company management teams have had to act quickly. Clearly, this is a situation which nobody wanted and, and evolve very fast. So, I think we've been very impressed at how company management teams have approached their businesses, about how they're approaching all the stakeholders in the business and not being myopically focused on shareholders or any other stakeholder that's been very impressive as well. And you know, there are companies that are taking actions which are going to make themselves stronger. Hopefully, they'll have a stronger reputation, stronger competitive position in the future. And I think that it's very important for companies to take the actions that they think are appropriate in the current times. That's really the message we're giving to management teams.

Black: Ben, thank you so much for your time. For Morningstar, I'm Holly Black.

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Holly Black

Holly Black  is Senior Editor, Morningstar.co.uk

 

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