James Klemptser is deputy head of multi-asset funds at Liontrust. He says taking income from capital tends to suit certain clients, specifically those that have a “target number” in mind for how much they want to withdraw from their portfolios annually.
He says clients should always check whether their investment manager is achieving an income return from capital gains. Klempster says he prefers not to do this, and to use alternative asset classes to generate a natural income if one cannot be obtained from equities.
Bird in the hand
Guillame Paillat, multi-asset investor at Aviva Investors, says that in periods when growth stocks that are not income payers are performing well, “it is better to own them, even if it means paying income from capital gains, than it is to lose money on the income-paying stocks that fall in value”.
Kamal says: “Thirty years ago almost every stock paid a dividend, now a lot of them don’t, so it can’t be just about focusing on the size of the income.
"I would also say that we may be entering a period of time where economic growth will be very rare and hard to come by.
"Growth is the new oil, and in that context, paying slightly higher valuations may be justified."
Paillat is another investor who is cautious on the outlook for global markets, but he takes the view that equities in areas such as healthcare can be both defensive and dividend paying.
Michael Walsh, a multi-asset investor at T Rowe Price says the income/growth trade-off in equities also has a structural element.
This is because, he says, many of the best income-paying stocks on the market right now are “traps”, as they are not really growing and eventually will have to cut their dividends.
With this in mind, he says paying income from capital gains may sometimes be the wisest course.
Kevin Thozet, part of the investment committee at Carmignac, says the key for equity income investors will be to have more diversification, which “means more of the very high-yielding stocks and more of the high-growth stocks.
"Many stocks have suffered as a result of higher interest rates and bond yields, but the mistake would be to just buy the equities that benefit from that; if rates and bond yields are cut from here, then it would be best to own a different set of equities”.
david.thorpe@ft.com
