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Scoring on the rebound

Having engaged in what I consider to be merely a little realism recently – pouring cold water on all those pointing to the re-emergence of growth in the economy – I was bound to get my comeuppance.

Last week, I returned from the Cofunds Platform Conference in Hemel Hempstead to find the market trading above 5,100. The rebound really has been too significant to ignore but will it continue?

The answer, of course, is possibly. The easy money has been made and a setback cannot be ruled out but markets could motor more before this happens. In other words, it remains anybody’s guess – as it always is.

I take my hat off to a friend, a retired investment banker, who said last April that the turn had taken place and piled back into shares. My own purchases have been altogether more circumspect.

The improvement in confidence was evident at last week’s conference. The theme was generating income for clients and the fund manager presenters and the IFA audience were remarkably upbeat.

With two fixed-income managers, two specialising in UK equity income and two global equity players, the ground covered was wide and varied. If one message came across, it was that, despite the rise in both bond and equity markets, there are still opportunities out there.

One worrying fact emerged though. Following the collapse in banking dividends, it now appears that a mere seven companies in the FTSE 100 index account for more than half the income generated from this benchmark. Add in a further 13 companies and the percentage rises to nearly three-quarters. Moreover, much of this income arises in dollars. Unsurprisingly, only one bank features in the top 20.

Generating an income is, in the greater majority of cases, the principal reason for investing. If not needed now, then the income will be required at some stage.

With cash returning next to nothing and government securities looking vulnerable to increased issuance and a possible return of inflation, corporate bonds and equities appear the obvious choices. The fact that an increasing number of companies have omitted or cut their dividend payouts is a concern though.

Richard Romer-Lee of Old Broad Street Research made the point that while the use of passive index-tracking vehicles might have been sufficient in the recovery that has seen shares bounce back by more than 40 per cent from the depths of six months ago, from now, the hands-on approach of an active manager would become more important.

Certainly, in the field of income generation, it seems no more than prudent to rely on the detailed research that these houses carry out.

This is as true for bonds as it is for equities. Guarding against default is as crucial as ensuring, so far as you can, that the company you are investing in has sufficient cash to maintain its payout ratio.

It was clear that HSBC’s decision to cut its dividend had caught many managers unawares. But in some cases, the passing of a dividend had resulted in the shares rising as investors applauded cash conservation.

I admit that the extent of the recovery has surprised me. The likely cuts in Government spending and the increase in VAT next year may well take their toll but investors seem prepared to look beyond these to better times ahead.

One date does worry me though. When one IFA asked about the effect of a general election next year on the market, I pointed out it wasn’t the election that should concern him but the Budget that will inevitably follow close after.

Brian Tora (brian.tora@centaur.co.uk) is principal of the Tora Partnership

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