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Seen it, doing it

The trick to predicting the future is to know what will happen next. In the black and white world of compliance, the past may be no guide to what lies ahead but, for example, firsthand experience of Australia’s financial advice revolution a few years back has not exactly hurt better business guru Brett Davidson as he continues to guide UK IFAs through similar terrain in 2011.

I met another person who had, as it were, seen the future while chairing the recent 2011 Unique Boutiques roadshow around six lovely venues and the Manchester Airport Radisson. We covered Rathbones multi-manager David Coombs’ thoughts on asset allocation last week and other contributions included views on China and India from Insynergy and some typically forthright opinions on UK stockpicking by both SVM’s Neil Veitch and Paul Mumford of Cavendish.

This week, however, I plan to concentrate on Pictet Asset Management’s take on buil-ding a global equity income portfolio. According to Bruno Lippens, senior investment manager of the group’s high dividend selection portfolio, today’s “income challenge” stems from historically low interest rates, volatile markets and the threat of inflation.

He said: “We have always been told bonds are less risky than equities but can you really say now that, for example, a Spanish govern-ment bond is a low-risk investment? Our traditional ways of looking at risk need to adjust to the situation.”

How, in such an environ-ment, do managers meet the principal needs of the income investor – stable levels of income, inflation protection and reduced levels of risk?

As it happens, Lippens has been able to see the future because, six or so years ago, Japanese investors approached Pictet with those three income-oriented concerns. They wanted inflation protection, not too much risk and an attractive yield – which, at the very least, meant more than the 1 per cent being paid by Japanese government bonds.

He said: “Only two asset classes behave well in the face of inflation and since you cannot derive an income from commodities, that leaves equities – but they cannot be too risky.”

Pictet’s solution therefore has been to focus on a mixture of high dividend shares – with the cyclical financials, pharma-ceuticals and consumer goods companies stripped out – to drive share price outper-formance and infrastructure stocks – minus private equity and non-cash-generating green-field operations – to help reduce volatility.

The resulting common ground in that little Venn diagram contains utilities, railroads, telecoms, pipelines, toll roads and waste management companies and helped Pictet become one of the biggest investment managers in Japan, with some £8bn in the high dividend selection strategy alone.

Lippens made three other points, the first being that the utilities half of the portfolio’s universe is regulated – “the best protection you can have from competition” – while the infrastructure half is oligo-polistic in nature, which builds in barriers to entry and pricing power of its own.

Second, only local regul-atory, environmental, political and social factors matter to these companies – thereby diversifying risk far more than the average global equity portfolio. Finally, said Lippens, companies that pay higher dividends also have a habit of outperforming competition.

I have written here before of my confusion at the fund industry currently focusing much of its marketing firepower on global equity income vehicles when the needs of investors do look as if they will be well served by some exposure to such products. In the past, surely such an outcome would have been more the result of happy coincidence than any serious planning.

Perhaps it just has some-thing to do with the current alignment of the stars and no way can this be a permanent state of affairs. But, just for the moment, the likes of Pictet high dividend selection – and indeed JPM multi-asset income, which has shattered the traditional image of the equity and bond portfolio and rebuilt it for this century – almost restore my faith in fund management. Almost.

Julian Marr is editorial director of and and co-author of Investing in Emerging Markets – The Bric Economies and Beyond


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