The investment strategy that's taking the market by storm

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According to Certitude Global Investments CEO Craig Mowll, the RBA’s decision to cut the official cash rate is seeing a huge amount of pre- and post-retirees look into yield.

“Without question, post-GFC, yield is a very high priority,” he said. “That’s going to be a really big topic.”

He believes that most investors in this position have tended to look for yield from two different sources: Australian equities and term deposits.

“But with rates falling – and likely to continue falling – there is all of a sudden huge interest in where to get ongoing sustainable income,” he said.

“One of the things that’s gone missing in people’s portfolios has been a global position. Global’s been very underweight. It’s been driven heavily on emotion, and it’s been driven heavily around the fear of what’s going on in the US, Europe and China.

“What’s now coming up are some tremendous opportunities to invest in global equity income. And global equity income is really starting now to hit the radar, because people are starting to see an asset class now that they hadn’t really considered, and had been heavily underweight in, now being a proposition that can address their yield issues.”

Mowll conceded that equities – whether global or Australian – do come with their risks, and he believes that investors are still learning to overcome their fear.

“But the thing is, what is interesting about global equity income is the consistent amount of income that’s coming in from the dividends. So you’re looking at around 5-6% coming in. It’s actually becoming quite a quality proposition,” he said.

“The fact there is the opportunity for potential capital appreciation on that actually means that that income continues to grow for them. It happens to be quite an interesting proposition that they in the past haven’t properly explored.

“Income streams for equities get that opportunity to grow over time. But when it comes to fixed income as a comparison, it’s exactly that – it’s fixed. In the case of equity income it’s got the opportunity to grow with inflation.

“On a rolling three-year return basis, there is on period over the past 20 years when a high-dividend strategy has underperformed the world market. And I think that’s just an amazing statistic that gives this strategy a lot more brevity for people, and a lot more focus when it comes to putting their portfolios together.”

He noted that investors are fearful of volatility, but claimed that dividend-paying stocks have a far lower volatility rate than their non-dividend-paying counterparts (around 17% versus the index, compared to 27% respectively).

But despite these fears, Mowll believes that investors who investigate the global equity scene are now jumping into it with gusto.

“What we’ve been surprised about is how quickly people have understood it, and how quickly they’ve wanted to start to take advantage of it,” he said.

“In fact, I almost hesitate to say this statement, but it’s one of the things I’ve seen people jump on faster than nearly anything I’ve seen in the last 20 years. And I think that’s because it’s got such a strong timing issue to it.”

  • Stephen on 17/12/2012 10:15:29 AM

    I wonder what countries they are referring to. Many people I know are very concerned about the high value of the AUD and investing overseas. Most only see the AUD going down instead of up. I am very interested in seeing where the AUD goes with the next major hiccup in the US. It is way over valued so why would anyone want to be exposed to significant currency risk? QE 3 is having minimal impact on the US market so that leaves risky BRICS investments. I think Mexico is a much better solution as it is the US's China.

  • Paul F on 17/12/2012 10:57:01 AM

    Stephen, I think you may be a little confused - if the Australian currency softens then unhedged international assets will appreciate. That being said I am more concerned with the lemming mentality that seems to take over in these sort of periods.
    The Baby Boomers are looking for yield but do not want Capital Volatility. Yes there is probably some more interest rate cuts left in the Australian Market but at some stage rates will turn and then it is likely the a non-stimulus biased Australian Govt. Bond will return to around 5.0% (Based on inflation and GDP). 'Fixed income' funds will then suddenly demonstrate they are not are not capital protected. Unwary and ill advised investors will wonder why something with 'Fixed Income' in the name does not behave like a Term Deposit. The advice industry, instead of the product manufacturers will be blamed as they should have educated the clients. Anyone who lived through the 'Capital Stable' debacle of 1994 knows what I am talking about. For the new industry entrants - 'Capital Stable' became 'Conservative Growth' as consumers became very litigious over the fact they were not Capital Stable!
    The longest bond market rally in history is coming to an end and there is arguably less downside risk in equity markets (though higher volatility) than in bonds. Ask your manufacturer how their 'Head of Fixed Interest' is doing - you will find the answer is "very stressed".
    I would still be at a loss to understand why you would look for yield in offshore equity when the Australian market will deliver higher yield returns. I would be looking overseas for capital appreciation and diversification – not necessarily yield?

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