Hargreaves Lansdown has warned of a coronavirus hit to its income paying multi-manager funds as dividends across UK corporates are slashed amid the coronavirus uncertainty.
Hargreaves CIO Lee Gardhouse said in an update to clients the D2C platform was assessing the impact current market conditions would have on portfolio income streams, including the HL MM Income & Growth fund he co-manages.
He noted that businesses across the UK from retailers to travel and leisure firms and house builders had either cancelled dividends, deferred pay-outs or scrapped plans for share buybacks. Falling oil prices and lower interest rates could mean that gas giants and banks are also at risk of cutting their dividends, he added.
As such he said Hargreaves does not expect to sustain dividend increases in 2020 for its multi manager funds, breaking a string of consecutive annual hikes.
“We have exposure to a number of very experienced managers who have traded through the worst the market could throw at them,” he said in an update to clients last Thursday.
“They’re modelling short-term dividend cuts of between 15% and 30% for their funds. This means the dividend on the HL MM Income & Growth Fund will likely be impacted, as it was during the global financial crisis.”
> See also: Surging UK equity income fund yields set to fall back down to earth on scrapped dividends
The £2.6bn HL MM Income & Growth fund cut its dividend in 2009 from 3.05p to 2.86p in 2009, a year after the global financial crisis, but has subsequently raised it every year. In 2019 investors received 4.93p per unit.
The HL MM Strategic Bond fund and the HL MM High Income fund, which invests in a mix of equities and bonds, would also be impacted during the current slowdown if companies are unable to repay their debt, said Gardhouse.
Income streams from the two portfolios have also been dampened by a higher weighting to cash as managers have taken profits on fixed income holdings as bond prices plummeted.
Gardhouse said that generally Hargreaves portfolio managers had been taking more defensive stances and were holding off on adding more risk on the table. HL MM Strategic Bond managers Richard Troue and David Smith have significant exposure to UK gilts and US Treasuries, for example.
But he said Hargreaves’ managers still believed there were opportunities in stock markets.
“We think capitalism will survive this crisis, and as such abandoning the market entirely will prove to be wrong,” said Guardhouse in a separate update sent out on Friday.
“A lot of stock markets look good value according to our analysis – Asia, UK, Japan and Europe – but the US is not in bargain territory. Bond yields have picked up, and are looking more attractive, but a yield of 3.5% for investment grade bonds is not high when looking historically.
“So far we have increased our exposure to UK and Japanese equities by a small amount, but haven’t added significantly yet, as we’re waiting for a better buying opportunity.”
