The Covid-19 crisis is having a profound impact on economic growth. Many businesses in the most affected sectors, such as tourism, hospitality, aviation and retail, have seen significant volatility in their share prices and have cut or suspended dividend payments to preserve their cash reserves and protect the viability of their businesses.
This is proving challenging for charities that follow a traditional income approach to investment. Incomes from dividends are expected to decline dramatically over the year, with some forecasts predicting that UK and global equity income may fall by –40% and –15% respectively. This will be causing a headache for many charities that rely on dividends for income to fund the good causes they support. So what can be done?
Income advice for charities
Total return investing
A total return approach gives charity investors greater flexibility. Under this approach, the form in which investment return is received doesn’t matter as both income and capital can be used to meet spending requirements. Investments are managed to make the most of the total investment return that they generate. This enables charities to focus on investments that are expected to give the best performance overall, rather than on investments which will give the “right” balance between capital growth and income.
This means that even in times of market volatility it is possible to maintain a stable pattern of distributions. For example, an income focus would have traditionally led charities to a UK biased portfolio. In the first half of the year, the UK equity market fell –17.5% compared to global equities which returned +0.5% in sterling terms. Part of these significant dispersions can be attributed to the sector composition of the UK market and the more meaningful relative falls in dividends. However, this is not a new trend. Over the last five years the UK market has returned +15.0% while the IA UK Equity Income sector has only returned +4.7%.
Many structural themes have been accelerated as a result of the Covid-19 pandemic. Technological disruption will continue and UK equities are also concentrated in resources and banks; both of which have significant challenges in the face of climate change and a shifting global economy.
A total return strategy may also enable charities to make slightly higher withdrawals than strategies targeting an income-only approach. This is because equities produce real capital returns over the period and the investible universe will be broader. Additionally, a total return strategy ensures there is less danger of solely focusing on income targets and an increasingly concentrated list of higher yielding stocks.
A total return approach also provides the flexibility to increase diversification and access investment opportunities within alternatives that potentially provide little or no income, but that have the potential to achieve higher risk-adjusted total returns for the portfolio.
An example would be gold, which provides no income but can be a useful hedge against growth, geopolitical, inflation risks and market stress as is being evidenced by a strong rise in gold prices recently.
Please note that this article is a discussion piece only. It should not be deemed as providing advice.
How we can help
If you would like any advice in relation to the subjects discussed in this article, please get in touch with Simon or another member of the team in Derby, Leicester or Nottingham on 0800 024 1976 or via our online form.