Since the global financial crisis investors have faced the dilemma that many of the best-performing individual equities, and equity markets as a whole, have been those that also pay little in the way of dividends.
One of the consolations of those market conditions was the same persistently low inflation that benefited the stocks with little dividend yield, and given the very low inflation, the level of natural income required to pay bills was also lower, so that an income portfolio which yielded 2 per cent was often beating inflation.
But the much higher inflation we are all experiencing this year has changed that equation. In the first instance, higher inflation and higher interest rates have caused a shift in market sentiment, with many clients preferring to own so-called short-duration assets, that is, assets which generate cash flows today.
Many such assets pay a dividend, and so have outperformed against more early stage businesses that have yet to pay a dividend.
Financial repression
But Carl Stick, investment director and manager of the Rathbone Income Fund at Rathbones Unit Trust Management, says the challenge for investors now is that they are experiencing “financial repression”, that is, seeing the real value of their savings depleted by inflation.
He says: “For many people this is a very difficult and different experience. As an equity income fund manager, I know there is equity market risk to consider, but if we can provide a level of income that is competitive with the level of inflation, then we are in some ways helping clients deal with the financial repression.
"Higher inflation doesn’t really change how we run the fund, but it does mean there is more priority and focus on income now.”
The renewed demand for global equity income funds can be seen in the most recent data from the Investment Association, which revealed inflows into the sector of £678m in April.
The financial consequences of inflation on wider society is also on the mind of Ian Pyle, who runs the Shires Income investment trust at Abrdn, but his focus is on the impact on the economy as a whole.
He says: “There is a very clear issue that those least able to afford rising prices have to spend a greater proportion of their income on essentials.
"From an investment point of view we need to be aware of this dynamic when thinking about consumer demand, but also the possibility of regulation and government action to address the imbalance, with the energy windfall tax an obvious example.
"While this is an area of concern for the UK, we should also expect to see lower income segments receive better than usual wage inflation."
Pyle adds: "The UK labour market is particularly tight right now, and it is notable that as a direct result of Brexit this is being seen in areas of the job market that are traditionally lower qualified and more mobile.
"Hospitality, distribution, manufacturing, transport and construction are a few of many sectors where we are seeing the impact of staff shortages. That should hopefully have an impact on raising incomes, offsetting some of the pressure from inflation.”
