Page 12 - DIY Investor Magazine - Issue 28

THE OUTLOOK FOR UK INCOME Iain Pyle, Investment Manager, Shires Income PLC • The UK market’s reputation for dividend strength took a knock in 2020 • A skeleton Brexit deal and economic recovery favour income holdings • Active management and a focus on quality have been vitally important UK companies have a rich history of paying dividends to shareholders and historically, the UK market has been a secure and fertile place to hunt for income. This reputation has taken a knock in recent years, as interest rate policy, then Brexit and finally the pandemic has seen the UK equity income sector lag its peer group. However, the outlook for the sector has markedly improved since the start of the year. DELIVERING RESILIENT INCOME IN A TOUGH YEAR Perhaps first, it is worth looking at why UK equity income has struggled. Brexit has certainly put pressure on UK companies and has also seen global investors steer clear of the UK market. The pandemic brought new pressures: by the end of 2020, around 45% of companies had suspended their dividends and overall income was back to where it was a decade ago. It exposed companies that had been over-distributing at the expense of business investment. In this environment, certain elements have been important. Our focus on quality companies has given us a greater margin of safety and helped us avoid the worst of the dividend cuts. By the end of 2020, dividends in the Shires portfolio were down 13%, around one-third of the hit from the wider FTSE 350 index. ‘THE OUTLOOK FOR THE SECTOR HAS MARKEDLY IMPROVED SINCE THE START OF THE YEAR’ Active management has also been important. Our team covers every company in our FTSE 350 benchmark and it means we have someone watching every stock. This gives us the best chance not only of finding the right income stocks for Shires, but also ensures we are alert to any change in outlook. As part of this active approach, it has also been important to understand why companies are cutting dividends: have they been forced to suspend dividends by the regulator, for example, as was the case with the banks? Is the damage to their business likely to be short-term? Here, we would look at companies such as Euromoney, where the events business was badly damaged but should revive as life returns to normal. Then, there were areas where we felt the deterioration was likely to be longer-term in nature and we needed to sell the holding. These measures have helped ensure our investors haven’t felt the full force of difficult market conditions. ‘THE SUCCESS OF THE VACCINE ROLLOUT GIVES THE UK A REAL CHANCE TO GET BACK TO NORMAL BEFORE ANYONE ELSE AND RECOVER QUICKER’ CHANGING MARKET CONDITIONS While we do not define ourselves as ‘value’ investors, income investing tends to have a natural tilt towards value. Low interest rates have been a headwind for the ‘value’ style in recent years and growth companies have performed notably better. The clearest evidence has been the strong performance of high growth technology companies. The vaccine announcements have brought some expectation of economic recovery and with it, a rotation into more economically sensitive parts of the market. Inflation expectations have pushed bond yields higher. DIY Investor Magazine | Apr 2021 12