Investing Beyond the Mainstream: Equity Income

Other managers prefer an active approach. Phillip Win, senior financial planner at Profile Financial Services, recently included the IML Equity Income Fund from Investors Mutual into client portfolios. “What I like about them is that their process is very valuation-driven,” he says. “We have a focus on the preservation of capital – the ‘don’t lose me money’ mentality.”

The IML approach is to limit capital downside and increase yield by buying call options on the portfolio. Here’s an example. If the fund manager holds AGL and decides they would be happy to sell if it reaches a certain level, they sell call options that kick in at that particular price. The investor gets the premium for selling the call option – and if AGL’s stock hits the level and the option is triggered, then the investor has also made money on the share price gain and was happy to sell at that level anyway. Some upside is sacrificed, but the option premium provides more income. “And it’s still valuation-led because I would have sold it at that level anyway,” Win says. The management fee is 0.993%, with no performance fee, and it aims to produce a yield 2% above that of the S&P/ASX 300 Accumulation Index on a rolling four year basis.

Some advisors look further afield than Australia for equity income. Nigel Douglas, chief executive officer of Douglas Funds Consulting, notes global equity income funds have been particularly popular and well-run in the UK. He highlights Columbia Threadneedle’s Global Equity Income Fund available in Australia at an annual cost of 1.05% , and the Henderson Global Equity Income Fund, “led by an experienced team with a long track record based on the well-founded application of a rigorous equity income investment process,” Douglas says.

Both these strategies seek dividend yields across both developed and emerging markets of at least 4%, compared to an average of 2.5% for the MSCI World index. “There tends to be a strong bias to sectors such as consumer staples, telecoms, financials and utilities,” Douglas says. Typically, they have a value bias and so lag growth-led markets, but expect to outperform over the longer term. Unlike Australian funds, franking credits dot not apply in international funds, and investors also need to consider currency risk.

At OmniWealth, senior planner Genene Wilson – who historically has recommended direct equities – has started to see the benefits in ETFs. “This is not to say there is not a place in some clients’ portfolios for direct equities,” she says. “But for the core of most client portfolios, ETFs just make more sense: it’s hard to beat the market year in year out.”

Some of her positions have a yield focus, and she uses the same BetaShares harvester product that Darren Johns does. She also uses the ANZ ETFS S&P/ASX 300 High Yield Plus ETF (0.35% MER), which focuses on the top 40 highest yielding stocks.

A twist on the theme is the VanEck Vectors Morningstar Wide Moat ETF (MOAT), which she also uses. “Internationally, MOAT seeks high quality companies rather than a yield play,” she explains. The idea is to track companies with sustainable competitive advantages, which it does by following an index devised by Morningstar. While not exactly an equity income strategy, it’s another example of a low-fee (0.49%) passive vehicle providing equity exposure with a different way of thinking to the mainstream.