Shelter from the typhoon of falling knives

For many, the immediate concern has been to c atch a falling dividend

Urgent job vacancy: applications are sought for investment managers with an unblemished record of forecasting and proven ability to catch falling knives. Applicants swathed in bandages need not apply.

Investors looking for guidance on the direction of stock markets have risked multiple lacerations since the devastating Covid-19 pandemic swept the world. Equity markets have plunged, rallied, then faltered again.

“Trend” is almost impossible to discern amid the daily convulsions. Over the past few weeks alone, the FTSE 100 has pivoted from 5741 on May 14 to 6115 on April 29 and currently stands at 5993.8.

The FTSE 250 index, largely comprising Uk-economy facing medium-sized companies, has fared little better. It was swung from a high of 16835 on April 29 to 15404 on May 14 to 16398.86 currently. Little wonder, in such volatility, investment management has become an exercise akin to catching falling knives.

We are nonplussed by it all. Amid the torrent of contradictory advice on buying, swelling and switching came this Delphic advice from Vanguard senior investment manager James Norton: “Investors should do nothing, but consciously do nothing”.

Sage advice – if only we could fathom what he meant. He went on to recommend that investors do something: “rebalance their portfolios”. Well, we could if they could stand still for a minute.

“Look at your portfolio and check your allocation,” he explained. “If you were in a portfolio that was 70/30 equity and bonds yet due to the market fall you are 50/50 bonds and equities, you should rebalance because, if you don’t, you won’t benefit from any stock market bounce.

“You need to sell your assets that have done well – i.e. the fixed income that has given you that protection – and you need to buy more equities.”

Buy more equities? As if we were not already lacerated trying to catch just one of the falling knives.

For many, the immediate concern has been to catch a falling dividend as announcements of payout cuts totalling £30 billion have rained down over the past six weeks. Investors reliant on dividend income to support them in retirement have been hit as the cull has mounted. What to do – other than do nothing, consciously or otherwise?

Some useful practical advice emerged from a video seminar organised by the Citywire website last week. It attracted almost 500 people to hear advice from a panel of four experts – Toby Ross of Scottish American Investment Company,

James Burns of Smith & Williamson, Doug Brodie of Master Adviser and Andrew Summers of Investec. Key points were:

● The danger of relying on high-yield, ex-growth stocks whose payments are unsustainable

● Risk of capital loss from recycling from one high dividend payer to another

● Importance of geographical diversification beyond the UK

● The attraction of alternative income sources in infrastructure, bonds and specialist property

● The challenge of rebalancing portfolios by switching some money out of equities or shares, at a low point in the stock market

● Which markets and sectors offer good long-term income.

Long trusted dividend payers such as Temple Bar Investment Trust has been badly hit by the market slump and announced that its dividend would be cut. Rival Troy Income & Growth made a similar warning. Yet there are some exceptions to the great dividend scything. Last month, Dundee’s Alliance Trust declared a first interim dividend of 3.595p per share, a three per cent increase on last year. This £2.6 billion global trust which has gained 6.4 per cent over the past turbulent month and 62.7 per cent over five years, beating the IA global trust sector average over both periods, is joint top of the Association of Investment Companies list of “dividend heroes” with 53 consecutive years of increased payouts.

I sounded a cautionary note here two weeks ago about the sustainability of dividend heroes’ revenue reserves, so caution is advised. But Alliance has revenue reserves of nearly £110 million, sufficient to cover last year’s dividend more than twice.

The 5.6 per cent-yielding City of London cheered spirits last month when it said it would use its revenue reserves to make a record 54th consecutive increase in dividends. But this cannot but beg questions as to what happens when the dividend drought extends into 2021 and beyond.

With this caution in mind, the £287 million Diverse Income Trust yielding 4.5 per cent held its third interim dividend this month, while the £2.4 billion 3i Infrastructure declared it was upping its target dividend by 6.5 per cent to 9.8p per share for the year to March 2021. The trust, investing in assets across Europe, currently yields 3.7 per cent.

Tw other areas income investors should watch as this typhoon of falling knives continues: trusts specialising in renewable energy infrastructure and those in the Japan, Biotechnology & Healthcare, Asia Pacific Income and Global Emerging Markets sectors. Full details are on the AIC website.