“The level of yield offered by fixed income has reduced, which means that more defensive, high-grade government bonds don't currently offer high levels of income,” he says.
Many UK companies were forced to suspend or slash dividends during 2020 in light of the pandemic’s financial impact. In the US, many companies managed to maintain dividend payments and some UK companies have since reinstated payouts.
“Even though the coronavirus pandemic caused a significant reduction in dividends in 2020, equities can offer relatively competitive levels of income through company dividends,” says Mills, who points out that UK shares are offering a dividend yield of 3.1 per cent, compared with the UK 10-year gilt yield of 0.8 per cent. For comparison, the yield on UK corporate bonds is around 1.8 per cent.
But, he adds: “Investors should be mindful not to over-reach for yield, as equities add risk to a portfolio compared with fixed income.”
For Willis Owen’s Lowcock, the role of equity income in multi-asset portfolios remains important, given that “it’s one of the few assets that can grow, it’s almost inflation-proof to a certain extent”.
Metrics
Some of those future equity ‘winners’ that investors identify may well be companies with intangible assets.
Something that investors have been increasingly calling into question is the relevance of traditional metrics in accurately measuring equity valuations.
Christopher Cowell, quantitative investment strategist at 7IM, says: “When we look at the some of the most successful companies in the world – as proxied by market capitalisation – a significant portion of their worth is derived from intangible assets, such as intellectual property, brand and human capital.”
Despite this, traditional accounting methods have failed to keep up, remaining focused on assessing the intrinsic value of a company based upon its physical assets, he adds.
“By failing to properly account for the value that is created by intangibles, accounting standards are rendering traditional company valuation metrics, such as price-to-book and price-to-earnings, increasingly irrelevant,” Cowell says.
“This is true to a certain degree,” Beaufort Investment’s Balkham adds. “However, we have equal confidence that there are a growing number of stocks for which the growth assumptions embedded in their price-to-earnings and price-to-sales ratios are simply too optimistic.
“The same arguments that were used at the height of the ‘technology bubble’ to substantiate extreme valuations are being bandied around again today.”
Lowcock and Patel agree that where traditional metrics can be useful is in comparing companies in one sector against each other.
In some cases, it is more about a company’s journey than its profitability, says Lowcock.
“You don’t buy a Tesla based purely on metrics, you buy a Tesla if you believe in the vision.”
