1. Equity Income Management
Diane Wilde
Nov 2011

2. 2
Equity Income as a genre of investment….why?
• World population ageing fast …and living for longer
• Dividend streams have lower volatility than capital movements
• Difficulty of Govnt ability to plug widening pension fund gaps…people forced to savings for
reliable income
• Dividend is an absolute form of corporate governance. The board have to remunerate
shareholders based on sound assumption for operating and growing their company
The financial crisis has
sucked cash from the
system which will be
difficult to replace
The globalisation of
equity markets has
been pushed more
quickly down the line
as a function of this
crisis
Income streams with
strong governance
important for future
spending and
consumer well-being

3. 3
•Investors invest to achieve returns in excess of cash and then bonds (in a normalised
world)
•Capital protection from future cash flow….earnings and dividend
•Dividends (if not abused and “fraudulent”) and dividend growth are a key sign of the
financial health of a PLC
•Finance directors fiduciary duty is for provide long-term returns for shareholders….the
dividend is that key (shorter-term = positive time value of cash) return which provides
“choice “ for shareholders….capital return carries greater risk both long-term (= time
value) and short term (= volatility)
•See “do dividends count paper” ….same theory still applies….financial crisis caused by
debt and geared cash products…caused by cash being sucked out of the system…(this
paper could be updated)
Main tenets of Equity Income management
Dividend growth the
single largest
contributor to
nominal investment
returns across key
developed markets
for the past 40
years.
(Soc Gen)

4. 4
•Investment style….GARP and pragmatic…..the market bounced from lows on
Price/Book…..would have been too risky as a complete strategy….but could have been
incorporated more into portfolios
•How define universe?...Thematic, valuation, screen on cash flow on dividend/dividend
growth. Yield is not a good word as it is a function of DIVIDEND (which is the cash flow)
and PRICE….which can vary….yield create value traps and no idea of how a company’s
cash flow operates
•Earnings not to be left out of the analysis….it is a function of turnover (= product), cost,
and margin….full company reports to be analysed for competitive position, value within
global sector (to avoid “benchmarking”)
•“Benchmark aware” to allow key over/underweights…..In March 2000 there was only one
stock to sell and MASSIVELY outperform = Vodaphone (was 14% of ASI and OEIC
managers were using synthetic bonds to get exposure)….DIVERSIFICATION risk is
something to be very aware of in the UK
Main tenets of Equity Income management
And this applys
globally….indeed
more likely that
the emerging use
of the dividend
globally as a key
driver to
remunerate
shareholders
could result in
stronger business
models

5. 5
Why are dividends and cash-flow important factors to equity investment?
Dividend returns
are less volatile
than capital returns
They represent the
near-time return on
capital

6. 6
The future?
• UK market as concentrated as 10 years ago….(perhaps more so…but have not checked
the figs)
• UK equity income managers are using overseas to try to add value
• True growth is global equity income ….but we are not there yet (other competitors are trying
to market value investing as income investing …the 2 styles are different
• Identify income as opposed to value….scope to merge and re-mandate funds?
• Mkt cap to GDP of major markets
Improving
governance in
Emerging markets
will lead to more
investment
opportunity (it has
to come to achieve
global economic
equilibrium)

7. 7
Global Equity Income sector
• IMA created Global Equity Income sector at start Jan 2013
• At least 80% of assets in global equity
• Require diversification by geographical region and achieve an historic yield on distributable
income in excess of 110% of the MSCI World Index at the funds year end
Global easier to
find best of breed,
and to avoid
benchmarks. This
area to become
more populated
and competitive

8. 8
Most major asset management firms are now seeking an equity income discipline
following the “lack of cash” and ageing poulation
The mantra of total
return has not worked
as hedge and
derivatives sucked the
cash flow from
underlying traditional
asset classes
Teaching an ageing
population to dis-save
is not that easy
Accumulation units to
be on the wane in the
future ?

9. 9
Oh….and back to share buy-backs
Too many….and timing not
good
Executed when prices are
inflated….and company
directors need to enhance
earnings to keep bonus
schemes in line (see do
dividends count paper)
Again the issue of
governance and shareholder
value pop up….

10. 10
To look out for……
• Double taxation , currency
• M&A activity….a resumption of ill-thought –through acquisitions will suck cash flow from the
corporates (because it is cash flow that pays the advisors), reduce the theoretical dividend
and drive back to “total return” (aka…the dividend does not count , we prefer capital!)
• As shareholders , be prepared to support corporate FD’s in treating dividends more
seriously…and by that do not mean pay out as much as possible (early 90’s M&G put huge
pressure on companies to maintain dividends when they should have been cut)
• Sustainable becoming a buzz word in the dividend world