Focus on: Australian equity income funds
The low interest rate environment, together with the low yields from traditional defensive assets, is prompting many
investors to start looking at shares as a source of higher income. Investing in companies with solid dividend yields such as
Australian equity income funds may offer a partial solution.
There are a number of different types of Australian equity income funds. In a falling market, there are some that will lose
much less than the market, while there are others that are likely to fall in line with the market. While most of these types of
funds generate significantly higher income than the S&P/ASX 300 index, the trade-off is less potential for capital gains.
So, apart from fees, what should you consider when looking for an appropriate equity income fund?
Downside protection
If you’re looking to incorporate this asset class into your portfolio, it’s important to consider your income goals. Would you
prefer to lose less than the benchmark in a falling market, at the expense of lagging returns in a rising market?
Or, are you looking for a fund that is equally likely to outperform in rising markets versus taking higher risk during a falling
market?
If you are seeking higher income with less volatility from your share investments, then you may be better suited to some of
the equity income funds with derivative protection. In other words, those funds that will lose significantly less in a falling
market but deliver higher income. Other funds can provide high income, with returns that are similar to the S&P/ASX 300
index as a benchmark.
Income — at the expense of capital gain?
Generating higher income generally comes at a cost; the potential for realised gains. Not only that, but under Australian
unit trust law, realised gains are included in distributions. The fund managers have the ability to manage the level of
realised gains that go into the distribution by selling parcels of shares that are in profit or loss before the end of the financial
year. This allows them to arrive at a desired overall distribution level.
Bridges Financial Services Pty Ltd (Bridges). ABN 60 003 474 977. ASX Participant. AFSL 240837.
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decision based on the content of this document. Examples are illustrative only and are subject to the assumptions and qualifications disclosed.
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