On the basis that equities’ struggles are fixed income’s gain, the relative attractiveness of fixed income is being boosted by thinning yields from equity income funds.
An overt indication of the difficulty equity income managers are facing is the trouble many have had in meeting the IA’s own definition of what constitutes an equity income fund. Many funds are falling foul of the 110% of the index yield rule. So much so, that a movement is underway to change these rules.
Whether that comes to pass is far from clear at this point, but it is hard to see how changing the rules on inclusion in an IA sector is going to anything to increase fund yields. In fact the reverse is more likely.
This morning’s report from the The Share Centre revealing that dividend cover is at its weakest since 2009 adds fuel to this particular fire. With the average FTSE 350 dividend cover now at 0.98x, many companies have very little room to manoeuvre with their dividend payments.
Some will attempt to maintain or raise dividends against the tide but this can only go on so long without putting unwise strain on balance sheets.
While these difficulties for equities managers do not do anything to directly increase fixed income yields, investors have to put their money somewhere and attractiveness is a relative concept in investing.
