According to an article in the Financial Times a few weeks ago, over 60% of the global bond market now yields less than 1%. Equally shockingly, just 3% of bonds yield more than 5%.
And with governments around the world propping up pandemic-stricken economies with low interest rates and easy money, the situation isn’t set to get any better for fixed-income investors any time soon.
Investors’ response to this situation isn’t surprising – a response starkly summed up in its title: Desperate hunt for yield forces investors to take ‘extreme risk’.
Déjà vu
In various guises, we’ve seen this movie before. And it doesn’t end well.
Chasing yield – and income – investors flock to assets and asset classes that they wouldn’t ordinarily consider. (And about which, incidentally, they know less than about those assets and asset classes that they ordinarily prefer.)
Zero-dividend preference shares. Split capital investment trusts. The various CDOs that so spectacularly imploded during the 2007-2008 financial crisis. Property. Gold. Fine art. Vintage cars.
The story is always the same: chasing higher returns, investors relax their criteria and pursue higher-risk investments – often, as I’ve said, in areas about which they know little.
You see the same thing happening today as happened in the run-up to the financial crisis, and during the ‘day trader’ dotcom boom. Only today, it’s CFDs and currency trading.
Normal service (slowly) resumed
I do have a lot of sympathy for investors who have seen their dividend income shrink in the last few months. The dark days of late March saw swinging cuts driven by the need to conserve cash going into a period of extreme uncertainty – or ceasing to trade – or both.
In many cases, it made sense – although in a few, I’m still scratching my head.
And it’s encouraging to see that companies are beginning to reinstate their dividends, and in some cases paying the dividends that were deferred, leaving investors no worse off, except from a cash flow point of view.
That said, don’t expect universal reinstatement any time soon: companies that have accepted government aid packages are barred from paying dividends (which is why some companies are paying back the money, of course), and in the hospitality and travel industries, profits – from which dividends are paid – are well down, and likely to remain so for some time.
Go with what you know
My own view is clear: going off-piste in a search for yield is not for me. Equity investing is what I understand best, and equity investing has stood the test of time in terms of my own investment performance.
Granted, the last few months were unexpected, and my income has dipped.
But in many ways, I suspect that my portfolio – and income stream – has proved more resilient than many. I’ve written before about Asia-focused income-centric investment trusts, and many real estate investment trusts (REITs) in which I’m invested have continued to maintain high levels of rental income.
Primary Health Properties, for instance, which lets out GP surgeries. Tritax Big Box, which lets out giant warehouses to supermarkets and online retail giants. Greencoat UK Wind (technically an investment company, not a REIT) operates wind farms.
Warehouse, which – unsurprisingly – lets out warehouses. And HICL Infrastructure (another investment company) lets out hospitals, police stations, fire stations, libraries and other pieces of public sector infrastructure. All have held up well.
Lemmings are losers
So not only am I not joining the ‘dash for trash’, I would counsel others to resist the temptation as well.
Over the long run, shares have performed well: when we look back on 2020, it will be a blip on a chart. An unwelcome blip, painful and frightening, but a blip nonetheless. And a blip that heralds that for the moment, bargains are on offer, for investors who know where to search for them.
Belt-tightening may be in order. Building a bigger income reserve as a safety buffer may be in order. But in my view, joining the dash for trash isn’t in order.