Perspectives: Volatility is great for income investors – keep calm and carry on

We have recently been espousing the benefits of income lifestyling for pre-retirement investors. By investing in income units and regularly reinvesting the income, investors are able to take advantage of market downturns to faster grow their income.

This works because the earned income is reinvested at lower prices and higher yields. In weaker markets income grows faster and clients move more quickly towards their retirement income goal. Rather than being concerned during a period of market volatility, income oriented investors can see this as an opportunity. If you want to get a greater understanding of how income lifestyling works, please contact us for more information.

The same works to great effect within an income fund. Big market drawdowns are a regular feature of markets, although this one is particularly rapid and painful. Fortunately, our process means that during market rises we are consistently trimming winning positions back to start weight, so during the strong markets in Europe and Asia in the early part of the year we were raising cash.

At the same time in the week or so prior to the drawdown, we reduced our equity exposure considerably. For example, we reduced equity by 7% in the Premier Miton Cautious Monthly Income Fund in the prior month.

This puts us in the position to reinvest cash into the much higher equity dividend yields at the most convenient time of the year. So many European and Asian stocks are due to go ex-dividend in the coming weeks. This year looks to be the reverse of the Covid drawdown when we had to work hard to replace the dividends that had been cut. We went into the drawdown with plenty of cash, so we believe it is now relatively easy to grow our income.

Over the past few days, we have been able to buy an energy company with a yield in double digits (including a special dividend), and utilities in high single digits. We plan to continue in this vein to secure our income for the remainder of this year and into next.

Another beneficial feature of these markets, for income investors is that the markets have finally pivoted away from large cap tech stocks into more broader sectors, in particular defensives are now doing relatively well. Having greatly reduced our exposure in the latter part of last year and into this year in the MAG7 and similar names we have been cautiously building up consumer staples and utilities. This builds the underlying dividend on the portfolio very favourably.

We cannot know how far markets need to fall to find a level which will attract enough investors to lead to a bounce. Similarly, we do not know whether authorities are poised to intervene with injections of liquidity to stabilise things. The priority in the US appears to be bond markets and the currency not the equity market. What we do know is that investors hate uncertainty. This is what is driving markets lower. The problem for the US markets at least, is the starting point was a valuation level that was especially high compared to history.

We do have a framework for understanding the medium-term goals of the US administration, whether they are going about them in the right way time will tell. This suggests being relatively under-exposed to US equity and the dollar in the near term continues to be the appropriate positioning.

David Jane

Premier Miton Macro Thematic Multi Asset Team