Equity income funds increasingly sophisticated
Equity income funds have received their first AA rating as managers develop sophisticated strategies tailoring funds for the retiree market, according to the van Eyk Research Australian Equity Income Review 2013.
The report states 10 fund managers were awarded an investment grade rating from a competitive field, with a top AA rating being awarded for the first time in this sector.
In addition to the AA rated manager, four managers received an A rating, five a BB rating and one a B rating, with BB and above considered investment grade.
The report invited 16 managers to participate, and of these four managers were screened by van Eyk in the initial assessment for not being sufficiently competitive while one manager declined to be rated.
The report describes the main objective of equity income strategies as providing a consistent return stream to investors greater than the dividend yield of their benchmark, typically the S&P/ASX 200 and ASX300 Accumulation indices, but not at the expense of capital gains when they occur.
van Eyk head of manager research Robert da Silva said fund managers in this sector have become increasingly focused on the needs of investors living off the income from their investments, with the better managers becoming more sophisticated at balancing the competing goals of generating consistent income and preserving capital. They typically use options strategies to boost income and limit downside risk.
Stock selection and valuation discipline are crucial in limiting the downside risk to the portfolio, with the best managers in this report having the most impressive fundamental investment research, da Silva said.
The tax implications of how a fund is managed are important for this sector due to the need for consistent returns. This might involve minimising short-term capital gains within the fund and favouring the accumulation of franked dividends, he added.
Da Silva said the past 18 months have been a challenging period for Australian equity income managers as they tend to underperform in strongly rising markets.
"The managers tend to perform best in markets that are priced on fundamental factors rather than the liquidity-driven markets we have seen recently. But over the longer term they generally outperform their underlying benchmark," he said.
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