Senior Investment Analyst Lin Ngin commented, “Products simply buying stocks expected to deliver higher dividends are being left behind in terms of innovation.”

“While it is still early days, the performance of many long-only products within the Equity Income sector is lagging their more innovative brethren.”

One particular element of this performance differential between long only funds and products able to implement derivative strategies is their ability to participate in corporate activities (such as share buy-backs) for lower yielding stock, which has resulted in a noticeable uplift in franking level for the more innovative strategies.

Historically equity markets have not provided consistent income via dividends along, therefore Lonsec believes funds that are able to diversify the composition of their distributions are generally better positioned to provide a stable income stream.

“Lonsec has a higher regard for funds able to provide consistent income without eroding the capital base,” said Ngin.

The review
Lonsec’s Equity Income Sector Review covered nine managed funds and four exchange traded funds. Across the active funds rated, only two were awarded Lonsec’s highest rating, ‘Highly Recommended’ – the Zurich Investments Equity Income Fund and the Colonial First State Wholesale Australian Equity Income Fund.

In addition, the review considered five prospect funds, one of which was added to Lonsec’s recommended list, the Legg Mason Australian Equity Income Trust. Lonsec considered some prospect funds that focused on investing globally.

“Currently there are no funds on Lonsec’s recommended list that invest predominantly in offshore assets,” said Ngin.

“However, we believe that products focused on income generation will continue to develop and are likely to broaden their investment horizons to include asset classes such as global equities, fixed income and other Australian equity strategies.”

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