Has yield come at the expense of performance? | BetaShares Insights

Have high yield stocks been a drag on your portfolio returns?

BY Alistair Mills | 26 September 2018
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Has yield come at the expense of performance?

Australian investors have likely recently felt the effects of market volatility, which has put downward pressure on many large cap Australian companies that offer relatively high yields. For investors with a concentrated single stock portfolio, this recent performance trend highlights the danger of relying on a small number of high yield stocks for retirement portfolios. Instead, investors may benefit from diversifying their income streams by utilising a fund that aims to provide sustainable and growing distributions, whilst targeting lower volatility than the ASX200.

Holding high yield exposures may have come with capital declines

By simply targeting yield rather than dividend per share growth, investors can be left vulnerable to dividend traps. As a result, many investors holding high yield investments may have suffered capital declines.

A focus on growing dividends, combined with expert active management has historically enabled the unlisted Legg Mason Martin Currie Equity Income Fund (which uses the same strategy as BetaShares Legg Mason Equity Income Fund (managed fund) (ASX:EINC), to reduce income shocks, reduce volatility and provide a level of protection against drawdowns when compared to passive high yield ETF exposures, as shown below.

Source: Bloomberg, as at 3rd September 2018. Past performance is not indicative of future returns.

5 Years as at 31/08/2018 Max Drawdown Std. Dev
Legg Mason Martin Currie Equity Income Fund -9.67% 9.92%
Australia’s largest ‘high yield ETF’ -20.38% 11.50%

Source: Morningstar. Past performance is not indicative of future returns. Data over 5 years as of 31/08/2018. As EINC is recently established, the performance of the unlisted Legg Mason Martin Currie Equity Income Fund is shown above to illustrate how a comparable fund managed by Martin Currie Australia using the same strategy has performed in the past over longer periods. Historic performance of the unlisted fund is not a reliable indicator of the performance of the EINC. Current performance may be higher or lower than the performance shown.

Income portfolios can be highly concentrated

Banks and the top 20 Australian large cap stocks have recently been a drag on performance, but many investors are heavily exposed and reliant on these companies for income.

  • In the S&P/ASX 20, banks make up over 41% of exposure
  • In Australia’s largest ‘High Yield ETF’, the top 10 constituents account for over 66%, whilst Wesfarmers and Telstra weigh approximately 10% each in the portfolio

The BetaShares Legg Mason Equity Income Fund (managed fund) (ASX code: EINC) has individual security caps of 6%, sector caps of 22% and holds between 40-60 stocks across a range of industries to help maintain diversification.

Source: Morningstar, as at 31st August 2018.

Dividends per share at the top end of the Australian market have declined

In order to live comfortably in retirement, retirees need an income return that exceeds their living expenses and grows above the rate of inflation – however many traditional high yield stocks have seen dividend cuts recently.

By comparison, EINC aims to deliver an attractive and growing income stream by investing in high quality Australian companies.

  5 Year Distribution Growth
Legg Mason Martin Currie Equity Income Fund 9.56%
S&P/ASX 20 Index 4.0%

Source: Bloomberg, data as at 31/12/2017. As EINC is recently established, the performance of the unlisted Legg Mason Martin Currie Equity Income Fund is shown above to illustrate how a comparable fund managed by Martin Currie Australia using the same strategy has performed in the past over longer periods. Historic performance of the unlisted fund is not a reliable indicator of the performance of the EINC. Current performance may be higher or lower than the performance shown.

The BetaShares Legg Mason Equity Income Fund (managed fund) (ASX: EINC)

EINC is managed by Legg Mason’s active equity affiliate, Martin Currie, and provides a relatively new and efficient way to access Martin Currie’s highly acclaimed and successful equity income strategy. EINC aims to provide an attractive, growing income yield above the broader share market over the long-term.

Key Facts

  • Ticker: EINC
  • Forecast 12 Month Gross Portfolio Yield: 7.2%*
  • Forecast 12 Month Net Portfolio Yield: 5.5%*
  • Distributions: Quarterly
  • Management Fee: 0.85%
  • Unlisted Fund Inception: June 2011
  • Unlisted Fund Size: $235 million as at 31st July 2018

*As at 31st August 2018. The yield forecast for the next 12 months is calculated using the weighted average of broker consensus forecasts of each portfolio holding and research conducted by Legg Mason Australia, and excludes the fund’s fees and costs. Franking credit benefit is based on the fund distribution and assumes a zero-tax rate. It is not to be interpreted as the offset achieved by unitholders during this period. Actual yield of EINC may differ due to various factors, including changes in the prices of the underlying securities and the number of units on issue. Neither the yield forecast nor past performance is a guarantee of future results. Not all investors will be able to benefit from the full value of franking credits.

For additional information on the BetaShares Legg Mason Equity Income Fund (managed fund) (ASX: EINC) follow the links below:

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