Lonsec releases 2010 Australian Equity Income Sector Review


Lonsec has released its 2010 Australian Equity Income Sector Review, which encompassed nine funds. Two of those received a Highly Recommended rating, the CFS Wholesale Equity Income Fund and the Zurich Investments Equity Income Fund.

An Australian equity income focused fund will typically have an emphasis on: Level of overall yield Franking level Capital gains tax management.

Duncan Knight, Senior Investment Analyst, commented, “This sub-sector captures a range of funds, from ‘traditional’ imputation funds that typically target both a high level of franking as well as index outperformance, to more alternative funds that can use a wide variety of derivative strategies to focus on generating consistent income streams at reduced levels of capital volatility.”

In ascribing ratings to this sector, Lonsec recognises that operating an equity product with an objective of distributing income requires a different skill set than is required for managing a long-only large cap equity fund.

“Products in this universe need to have a multi-level assessment that will not necessarily be found in products with total return objectives,” said Knight.

“This can make like for like comparisons with other Australian equity products problematic.”

Sector themes and observations

Number of funds

“Although we didn‟t see many new products this year, a continuing trend is the diversity of styles and techniques in managing equity products with distribution objectives,” observed Knight.
“This is unlikely to slow in the near term, especially if the outlook for impaired global earnings flows to the Australian economy and in turn, negatively impacts corporate dividend payments.”

Traditional funds vs. Low beta funds

Lonsec believes the Australian equity income fund universe can be considered to comprise two distinct sub-sections—traditional income funds and low beta funds.

“Traditional funds are those which hold long-only positions in stocks, and distributions will typically be derived from company dividends, interest payments and capital gains from the same of profitable positions,” said Knight.

“Low beta funds will typically employ more diverse equity holdings and strategies than the traditional style products, in many cases the use of derivatives either as a source of income generation or a risk/exposure management technique.”

Such techniques can provide scope for fund managers to have a more diverse portfolio of underlying stocks. Understandably this can provide more robust capital returns through full economic cycles. Low beta funds generally have the flexibility to employ option strategies and other alternative measures to achieve their desired outcome.“Lonsec believes that, where appropriately managed, funds that are able to provide more consistent income streams that are paid to underlying investors are in an advantageous position by not relying completely on the domestic equity market,” commented Knight.

IMPORTANT NOTICE: The following relate to this document published by Lonsec Limited ABN 56 061 751 102 (“Lonsec”) and should be read before making any investment decision about the product(s). Disclosure at the date of publication: Lonsec receive a fee from the fund manager for rating the product(s) using comprehensive and objective criteria. Lonsec‟s fee is not linked to the rating outcome. Lonsec does not hold the product(s) referred to in this document. Lonsec‟s representatives and/or their associates may hold the product(s) referred to in this document, but detail of these holdings are not known to the Analyst(s). Warnings: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to “General Advice” and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs („financial circumstances‟) of any particular person. Before making an investment decision based on the rating or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek further advice on its appropriateness. If our General Advice relates to the acquisition or possible acquisition of particular financial product(s), the reader should obtain and consider the Product Disclosure Statement for each financial product before making any decision about whether to acquire a product. Disclaimer: This document is for the exclusive use of the person to whom it is provided by Lonsec and must not be used or relied upon by any other person. No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by Lonsec. Conclusions, ratings and advice are reasonably held at the time of completion but subject to change without notice. Lonsec assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, Lonsec, its directors, employees and agents disclaim all liability for any error or inaccuracy in, or omission from, this document or any loss or damage suffered by the reader or any other person as a consequence of relying upon it.

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