SURVEY ON UK INCOME INVESTING

Transcription

1 OUR 2014 SURVEY OF UK INVESTORS REVEALS DEEP CONCERNS ABOUT WITH THE RESULTS SHOWING INVESTORS TRAPPED INTO LOW RETURNS BY A HOME BIAS WHICH EXPOSES THEM TO TODAY'S CLIMATE OF LOW INTEREST RATES.

2 ABOUT THE SURVEY Legg Mason surveyed investors AGED BETWEEN OUR 2014 SURVEY OF UK INVESTORS REVEALS DEEP CONCERNS ABOUT INCOME INVESTING WITH THE RESULTS SHOWING INVESTORS TRAPPED INTO LOW RETURNS BY A HOME BIAS WHICH EXPOSES THEM TO TODAY'S CLIMATE OF LOW INTEREST RATES. Contents LOCATED IN 20 MAJOR FINANCIAL MARKETS AROUND THE WORLD about current investments and future opportunities. This report focuses on the responses of the 200 UK investors who participated. Source: Northstar Research Partners Yet the survey shows investors realise that it is time to consider new options and there is a willingness to consider strategies to diversify into international investments and invest in higher yielding asset classes which could raise much needed income. The chief barrier to achieving this change revealed in the survey is simply a lack of information about the strategies. Information is provided about three Legg Mason Funds: Income Optimiser Fund, Global Equity Income Fund and US Equity Income Fund. 02

3 AN APPETITE FOR NEW INCOME STRATEGIES With interest rates flatlining, investors worry about meeting financial goals New strategies: Diversifying income investments into global bonds Fears about interest rates Investors do not think they are making good progress towards: Global fixed income opportunities UK bonds are a small fraction of the global fixed income market Euro 31% 38% 39% 44% 37% US 30% Japan 27% worry that low interest rates could derail progress providing for retirement maintaining their lifestyle generating income for living expenses Non-core Europe 7% US dollar countries 7% Index-eligible investment-grade sovereign debt outstanding as of 6/30/2013 Investors realise they must look beyond traditional income strategies that have home bias Invested in the UK 81% Ready to diversify hold UK only assets But ready to shed home bias 19% 41% of investors already have international investments say they are ready to consider them 36% would consider international equities 24% international bonds Global dividends offer diversification and yield Equities The UK is only one of the major markets for dividends North America UK Europe ex-uk Emerging markets Asia Pacific Japan Dividends paid by top 1,200 companies worldwide, bn, first quarter 2014 Source: HGI

4 UK INVESTORS, A PROFILE Allocation of investment assets Cash/cash equivalents 31% Equities 30% Fixed income 15% Investment real estate 12% Non-traditional Investments 5% Other 7% Concerns INVESTORS WHO ARE OPTIMISTIC about their investments next year 39 % Percentage who are concerned about progress toward achieving goals 52% 46% 45% 44% 41% 39% 39% 37% Percentage of investments INVESTED ABROAD 18 % Percentage of investors who plan to increase proportion of investment assets over next 12 months Equities 37% 32% Cash/cash equivalents 25% Fixed income 17% Non-Traditional Investments 18% Real estate 17% 04

5 UK INVESTORS, A PROFILE CONT... FOR INVESTORS WITH OVERSEAS INVESTMENTS, average percentage of income investments overseas 19 % Issues that would derail investment progress Economic weakness in Europe 48% Low interest rates/yields 38% Inflation 35% Low global growth 35% Reduced economic stimulus in the US 31% Low economic growth in the UK 30% Increasing market volatility 21% Geopolitical unrest 18% An increasing tax burden 16% Making the wrong investment decisions 14% Rising interest rates/yields 12% I am not concerned 12% Approach to income investing 73 % SAY IS IMPORTANT RATE OF RETURN ON INCOME PRODUCING INVESTMENTS SOUGHT 7% 5% RECEIVED Asset Classes Used to Meet Income Needs 38% 32% 26% 19% 19% 8% 05

6 : A STRUGGLE WITH HOME BIAS Investors are aware that low interest rates mean traditional investment strategies focused on UK assets may not generate sufficient income to meet financial goals but need advice about what to do next. Income investing is a key strategy for most UK investors but many struggle to make it work in a climate of low interest rates: Income investing is the primary goal for 47% of UK investors and a total of 73% say it is an important goal. But investors are failing to reach their targets, estimating they need to earn 7% on income producing investments and reporting they are earning just 5% The issue is home bias: UK investors traditionally invest in domestic sterling bonds and cash to generate income around 82% of investors hold UK only investments. Although this strategy may have worked in the past, today s low interest rates mean these securities are not yield sufficient returns to generate the income that investors desire. Illustrating the problem: Average yields of 10-year Gilts in the run up to 2008 were 5%. Since the crisis rates have fallen to 2.9% whereas a rate of 7% (4% real return + 3% inflation) is considered a reasonable base target for a 60:40 equity and bond portfolio. Investors need advice on new strategies: Investors are aware that interest rates are a problem 38% recognise that low rates could derail their plans many are confused what they should do. Some 31% are still holding onto cash and 27% believe cash is in the top three asset classes for investment opportunities over the next 12 months. Yield on UK bonds Primary goals of investing Providing for my own retirement 71% Maintain my current lifestyle later in life 61% Grow my wealth 48% Generate income for living expenses 47% Protect my wealth 44% Provide for my family after I am gone 26% Protect my wealth for my children 23% Provide for a family member s need 16% Saving for a major purchase 14% 06

7 SOLVING THE PROBLEM: DIVERSIFYING OVERSEAS AND INTO HIGHER-YIELDING ASSETS FOR INCOME Investors say they are ready to start to consider new approaches for generating income Shedding home bias : To generate the incomes they desire, UK investors must be prepared to shift their investment preferences beyond local markets. The survey shows 41% of investors would definitely or probably consider investing internationally but only 28% would consider doing this for income. Major barrier to investing internationally 49% 41% 40% Diversification: Other asset classes global bonds and dividend paying stocks offer income and reduce the impact of low interest rates in the UK. Of the investors who would consider international investments 36% would consider international equities and 24% fixed income. 26% 23% 07

8 SOLVING THE PROBLEM: DIVERSIFYING OVERSEAS AND INTO HIGHER-YIELDING ASSETS FOR INCOME CONT... Investors say they are ready to start to consider new approaches for generating income Not too big a leap to make: Some 38% of UK investors already use fixed income bonds and 32% use equity funds to meet income needs but these are almost exclusively held in UK assets. 41% say their main barrier to investing in these assets abroad is that they are simply not familiar with the opportunities. Understanding can drive change: Once they understand the benefits, UK investors are willing to consider overseas investments. Investors in the survey who already have investments abroad say they expect to gain through diversification (59%) and potential for higher returns (57%). Investors who have international assets perceive the following benefits 59% 57% 31% 13% 12% 08

9 STRATEGY GLOBAL FIXED INCOME: EARNING INCOME FROM INTERNATIONAL BONDS Investors need more knowledge about the opportunities in international fixed income Awareness-raising needed: Because they are unaware of the benefits that only 16% of investors rank international bonds in the top three investment opportunities over the next 12 months. Opportunities abroad: UK bonds make up just a small proportion of the global market for bonds so taking a global approach to fixed income investing means dramatically widening the investment opportunities. So what s on offer? Although the US, Europe and Japan are among the best known overseas markets for bonds, there are many other markets where compelling risk-adjusted returns can be found, such as Australia, Canada, Malaysia, Poland, Singapore, Sweden to name but a few. Investments are not limited to bonds issued by governments, but fixed income issued by companies and financial institutions as well. Risks versus eggs in baskets: Although investing abroad does mean new risks these are balanced by the benefit of investing among a much wider spread of investments which reduces the impact that market conditions specific to the UK will have on your portfolio. 09

10 STRATEGY GLOBAL FIXED INCOME: LEGG MASON INCOME OPTIMISER FUND Diversification and higher yields Diversify sources of income in higher yielding funds that manage risk. Strategic bond fund that seeks to maximise income yield through a business cycle while protecting returns on the downside. The Legg Mason Income Optimiser Fund offers investors an attractive income distribution yield through a well-diversified portfolio of global assets and currencies. PORTFOLIO MANAGER: REGINA BORROMEO We target an attractive distribution yield through a well-diversified portfolio of global assets and currencies, but with that allimportant element of downside protection What s special about this fund? Downside protection. The fund aims to balance generating an attractive income stream in all market conditions with preservation of capital. To achieve this balance, the fund invests in a broad mix of securities including sovereign and corporate debt across developed and emerging markets. It uses hedging tools such as derivatives to attempt to minimise risk and provide attractive total returns through market cycles and volatility. Quartile Ranking Period 3 month 6 month YTD 1 year Since inception Quartile Source: Morningstar, as at 31 July

11 STRATEGY GLOBAL EQUITY INCOME: GROWTH AND DIVERSIFICATION Compelling reasons to invest in dividend yielding stocks Appetite for international equities: Event though few UK investors have them in their portfolios, 51% say international stocks are in the top three asset classes for investment opportunities over the next 12 months. Dividends potentially signal a quality stock: Consistent dividend growth can indicate a quality stock as it demonstrates the company s ability to increase cash flow over time. Although investing in dividend yielding stocks, is more risky than bonds, it is a compelling strategy for income. Risks versus eggs in baskets: Although investing in equities does mean new risks these are balanced by the benefit of adding a new asset class which diversifies your portfolio investments. Investing abroad also reduces the impact that market conditions specific to the UK will have on your portfolio. The UK has only a small pool of dividend payers. The top 5 dividend payers were responsible for 37% of dividends in 2012 for instance. Dividends offer a potential cushion from volatility: Dividend-paying stocks have a history of lower volatility compared to the overall equity market which means they can provide stability to an equity portfolio. Inflation proofing: As dividends are not fixed coupons like most interest-paying bonds they provide some protection against inflation. The Legg Mason Global Equity Income Fund aims to achieve income and capital growth through investments primarily in a range of international equity and equity-related securities. 11

12 STRATEGY GLOBAL EQUITY INCOME: LEGG MASON GLOBAL EQUITY INCOME FUND Compelling reasons to invest in dividend yielding stocks Access growing income streams to offset the impact of inflation. A high conviction, and highly contrarian, global equity income fund that looks to invest in quality companies trading below their intrinsic value. The aim is to generate both capital appreciation and income. PORTFOLIO MANAGER: PAUL EHRLICHMAN Our goal is to build a portfolio that will survive the challenging global economic environment, thrive as fundamentally stronger businesses, and drive future investment returns. The Legg Mason Global Equity Income Fund: aims to achieve income and capital growth through investment primarily in a range of international equity and equity-related securities. What s special about this fund? Quality versus quantity: Traditional equity income funds invest in the biggest dividend-paying companies in a handful of defensive sectors, such as oil and gas, telecoms, financials and utilities. But this approach ran out of steam during the global financial crisis, when many large companies reduced or cut dividends. The Legg Mason Global Equity Income Fund focuses on quality, income-paying stocks that can survive and flourish rather than focusing on size. Quartile Ranking Period 1 year 3 year 5 year Since inception Quartile Source: Legg Mason as at 31 July

13 STRATEGY US EQUITY INCOME: DEPTH AND BREADTH OF OPPORTUNITY Invest in the world s biggest market for dividends Investors are interested in US stocks: 53 RANKED US STOCKS among the top three asset classes for investment opportunities over the next 12 months US equities have good brand recognition: 31% OF INVESTORS who invested abroad or would consider investing abroad identified the US as being the best country for investing opportunities over the next 12 months The US has the largest equity market in the world: America is home to the largest market of blue chips stocks with stable dividend yields US dividend paying stocks are often internationally recognised brands: Examples of dividend paying stocks include Apple, Coca Cola, McDonalds and Microsoft. 13

14 STRATEGY US EQUITY INCOME: LEGG MASON US EQUITY INCOME FUND Diversification by stock and sector Access the world s biggest market for dividend paying stocks. A portfolio of high-quality, income-generating companies paying consistent or growing dividend streams. Legg Mason US Equity Income Fund invests in high quality companies that are paying high, stable and increasing levels of dividends to investors along with the potential for capital growth PORTFOLIO MANAGER: PETER VANDERLEE Corporate balance sheets are the healthiest we ve seen in decades providing companies with significant financial flexibility yet dividend payout ratios remain low by historical standards What s special about this fund? Diversification: By aiming for diversification at both the sector and stock level, this fund ensures it is not dependent on a few big companies within a handful of industries for income. Traditional equity income funds invest in the biggest dividend-paying companies in a handful of defensive sectors, such as oil and gas, telecoms, financials and utilities. But this approach ran out of steam during the global financial crisis, when many large companies reduced or cut dividends. 14

15 FOR MORE INFORMATION ANY QUESTIONS PLEASE VISIT OUR WEBSITE AT LEGGMASON.CO.UK/INCOME FOR MORE INFORMATION ABOUT INVESTING FOR INCOME, LEGG MASON S INCOME FUNDS AND IDEAS FOR CONVERSATIONS WITH CLIENTS ABOUT INCOME. IF YOU D LIKE TO CONTACT US DIRECTLY PLEASE GET IN TOUCH AT: TEL: UKCLIENTSERVICE@LEGGMASON.COM 15

16 DISCLAIMERS DISCLAIMER This document does not constitute an invitation to invest. Past performance is no guide to future returns and may not be repeated. The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested. Fluctuations in exchange rates can affect the value of funds investing outside of the UK. The Legg Mason Income Optimiser Fund, Legg Mason Global Equity Income Fund and the Legg Mason US Equity Income Fund are sub funds ( funds )of Legg Mason Funds ICVC ( the Company ), an umbrella investment company with variable capital, authorised in the UK by the Financial Conduct Authority as an undertaking for collective investment in transferable securities ( UCITS ). Before investing you should read the key investor information document and the prospectus, which describe the full objective and risk factors associated with the funds. RISKS The Legg Mason Income Optimiser Fund Owing to its investment philosophy, this Fund should be viewed as a high-risk investment. Bonds: There is a risk that issuers of bonds held by the fund may not be able to repay the bond or pay the interest due on it, leading to losses for the fund. Liquidity: In certain circumstances it may be difficult to sell the fund s investments because there may not be enough demand for them in the markets, in which case the fund may not be able to minimise a loss on such investments. Low rated bonds: The fund may invest in lower rated or unrated bonds of similar quality, which carry a higher degree of risk than higher rated bonds. Emerging markets investment: The fund may invest in the markets of countries which are smaller, less developed and regulated, and more volatile than the markets of more developed countries. Asset-backed securities: The timing and size of the cash-flow from asset-backed securities is not fully assured and could result in loss for the fund. These types of investments may also be difficult for the fund to sell quickly. Hedging: The fund may use derivatives to reduce the risk of movements in exchange rates between the currency of the investments held by the fund and base currency of the fund itself (hedging). However, hedging transactions can also expose the fund to additional risks, such as the risk that the counterparty to the transaction may not be able to make its payments, which may result in loss to the fund. Interest rates: Changes in interest rates may negatively affect the value of the fund. Derivatives: Investment in derivatives may cause the fund to lose as much as or more than the amount invested. Use of derivatives may also result in greater fluctuations of the value of the fund.. Fund counterparties: The fund may suffer losses if the parties that it trades with cannot meet their financial obligations. Fund operations: The fund is subject to the risk of loss resulting from inadequate or failed internal processes, people or systems or those of third parties such as those responsible for the custody of its 16

17 DISCLAIMERS assets. Annual management charge from capital: The fund s annual management charge is taken from its capital (rather than income). This may adversely affect the Fund s overall growth. Legg Mason Global Equity Income Fund Liquidity: In certain circumstances it may be difficult to sell the fund s investments because there may not be enough demand for them in the markets, in which case the fund may not be able to minimise a loss on such investments. Investment in company shares: The fund invests in shares of companies, and the value of these shares can be negatively affected by changes in the company, its industry or the economy in which it operates. Emerging markets investment: The fund may invest in the markets of countries which are smaller, less developed and regulated, and more volatile than the markets of more developed countries. Fund currency: Changes in exchange rates between the currencies of investments held by the fund and the fund s base currency may negatively affect the value of an investment and any income received from it. Fund operations: The fund is subject to the risk of loss resulting from inadequate or failed internal processes, people or systems or those of third parties such as those responsible for the custody of its assets, especially to the extent that it invests in developing countries. Annual management charge from capital: The fund s annual management charge is taken from its capital (rather than income). This may adversely affect the Fund s overall growth. Legg Mason US Equity Income Fund Geographical location: This fund invests primarily the US, which means that it is more sensitive to local economic, market, political or regulatory events in the US, and will be more affected by these events than other funds that invest in a broader range of regions. Fund operations: The fund is subject to the risk of loss resulting from inadequate or failed internal processes, people or systems or those of third parties such as those responsible for the custody of its assets. Annual management charge from capital: The fund s annual management charge is taken from its capital (rather than income). This may adversely affect the Fund s overall growth. MORNINGSTAR DISCLAIMER 2014 Morningstar. All Rights Reserved. The information, data, analyses and opinions ( Information ) contained herein: (1) include the proprietary information of Morningstar and its content providers; (2) may not be copied or redistributed except as specifically authorised; (3) do not constitute investment advice; (4) are provided solely for informational purposes; (5) are not warranted to be complete, accurate or timely; and (6) may be drawn from fund data published on various dates. Morningstar is not responsible for any trading decisions, damages or other losses related to the Information or its use. Please verify all of the Information before using it and don t make any investment decision except upon the advice of a professional financial adviser. Past performance is no guarantee of future results. The value and income derived from investments may go down as well as up. 16