Income is a dominant driver of most asset class returns over the long run. John Stopford and Jason Borbora, co-portfolio managers of the Ninety One Global Multi-Asset Income Fund, recently wrote a thought piece1 in which they said; “given the importance of income, the decline in yields on most asset classes since the Global Financial Crisis (GFC), and the further fall during the COVID-19 crisis, appears to bode ill for conservative investors … The good news, however, is that there are still attractive opportunities across a range of asset markets and securities.” They conclude, that the key to thriving in this income desert is to build a diversified portfolio by selecting attractively priced individual bonds and equities offering decent yields, but whose income payments are comfortably covered by sustainable cash flows.
1 – Thriving in an income desert, July 2020.
Income also dominates as a driver of total returns when deconstructing the make-up of South African equity, property and bond index returns. In fact, over the past 10 years, capital has detracted from the total return generated by South African property and bond indices, while reinvested dividends are typically responsible for approximately one third of cumulative total returns for SA equities, as evidenced in Figure 1. Importantly, this is at an index level and does not represent the opportunities available at an individual security level to bottom-up stockpickers. While we do not have index data going back 10 years for South African investment grade corporate credit, we would expect the picture to be similar to that of government bonds, being that the income received exceeded the total return due to a portion of capital being lost to corporate defaults.