Global Income – Bull/Bear

It is almost axiomatic to say that confining oneself to the UK market means ignoring a huge global investment opportunity set. This is as true for income seekers as for any other market participant and as a result interest in global income is growing. Exposure to  the sector can be useful in portfolio construction, however the attraction lies not in the income generation per se, but in how the income requirement forces fund managers to develop disciplined investment processes with valuation at their heart. 

For investors interested in total returns, income should be an outcome not a driver, so the interest in any income fund, never mind global income funds, is the underlying methodology and discipline of the manager. Simply chasing income is undisciplined and may bring other risks in its wake, mainly concentration risk. This may manifest itself in sector concentration (as was the case in 2008/9), but really it is factor concentration that is the issue, sector concentration being a symptom. 

When looking at income fund providers, it is necessary to assess the process that delivers their overall philosophy into portfolios and the structure that supports that process. One of the most positive things that we hear from income managers is a commitment not to chase income come what may. The long term opportunity tends to be the exposure to an element of the value factor, but not to the exclusion of all else. Not all income funds are trying to achieve the same thing in the same way. Some are targeting income growth and sustainability, others an absolute level of income, others still a target of income relative to a particular benchmark index. Understanding these subtleties before committing is important, as is to understand how combining them within client portfolios can improve strategy risk/return profiles. 

Thomas Miller Investment is presently introducing some income funds to portfolios to diversify exposures in markets whose growth bias has driven strong performance latterly. In what we feel is the later stages of the bull market, we are looking to lock in some of that performance and also introduce a wider factor exposure in the belief that this will mitigate downside while enabling some (even if not full) participation in any further upside. 

Bull

• Global Income Funds should introduce factor and geographic diversification into portfolios
• To the extent that an income fund’s process pushes it to the value end of the market, long term exposure to that factor should deliver outperformance

Bear

• Central bank activity in the aftermath of the global financial crisis has made income increasingly difficult to find, thus income may become concentrated in more conventionally risky parts of the market at an inauspicious time
• The popularity of global income funds may sow some of the seeds for its reversal as fund flows in the event of a sell off exaggerate underlying market weakness.

 

Andrew Herberts
Head of Private Client Investment Management (UK)

Article first appeared in:

Investment Week (on the 11th January 2018)

 

Opinions, interpretations and conclusions expressed in this document represent our judgement as of this date and are subject to change. Furthermore, the content is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or a solicitation to buy or sell any securities or to adopt any investment strategy.

Thomas Miller Investment is the trading name of the businesses in the Thomas Miller Investment Group. This note has been issued by Thomas Miller Wealth Management Limited which is authorised and regulated by the Financial Conduct Authority (Financial Services Register Number 594155) and is a company registered in England, number 08284862.