The issue with equity market income – ESG and quality

Chad Padowitz

Talaria Asset Management

We’ve spent the last 2 wires talking about the importance of equity income as part of total return, but also looking at some of the challenges with chasing it in smaller pools of companies, such as the ASX200 with Australia being only 1.6% of globally listed stocks.

Not only does this limit portfolio diversity, but leaves investors vulnerable to quality and ESG risk.

A new challenge for equity income investors is ESG and the move to reduce portfolios’ carbon impact, while addressing any social and governance shortcomings. As we have seen in China with Evergrande and recently Facebook in the US, all components of ESG need to be addressed.

So if we agree ESG matters are important, this then further shrinks the opportunity set for equity income seekers. ESG filters will not only reduce what an equity income investor can buy, but the real challenge comes from reducing carbon impact, as utilities and energy sectors traditionally pay big dividends.

By diversifying to international markets, the pool suddenly becomes much greater and the opportunities to be judicious in your investments sharper.

As an example, let’s look at a significant holding for our fund - French oil company Total. We recognise that ESG factors not directly captured in financial statements can materially impact shareholder value and we think about the environmental approach specifically in both absolute terms but also whether a company is able and willing to change. While Total is a traditional mega cap oil company, 25% of management’s remuneration is now linked to ESG considerations, around 25% of their portfolio will be low carbon in a few years with net zero by 2050, and their output is diversifying, so that oil will ultimately be less than 30%. They also have a forward dividend yield of around 6.4%.

Source: Company Reports

However we have discussed the over reliance on dividends for sustainable and consistent income, so I’d like to conclude this series by offering, not just an alternative source, but one that complements traditional dividend returns. Better known outside the domestic market, Equity Insurance is using risk reducing derivative-based strategies like put writing to capture persistently high income. Used well it can provide consistent equity income, while lowering portfolio volatility.

We end by hopefully answering the initial questions: how to stabilise and diversify your sources of equity income. By looking to international markets, and increasing your income sources with one that’s not reliant on dividends, we believe in the end you can have the best of both worlds.  

........
The information in this article is general information only and is not based on the objectives, financial situation or needs of any particular investor. In deciding whether to acquire, hold or dispose of the product you should obtain a copy of the current Product Disclosure Statement (PDS) for the Fund and consider whether the product is appropriate for you. Wholesale Units in the Talaria Global Equity Fund (the Fund) are issued by Australian Unity Funds Management Limited ABN 60 071 497 115, AFS Licence No. 234454. Talaria Asset Management Pty Ltd ABN 67 130 534 342, AFS Licence No, 333732 is the investment manager and distributor of the Fund. References to “we” means Talaria Asset Management Pty Ltd, the investment manager. A copy of the PDS is available at australianunity.com.au/wealth or by calling Australian Unity Wealth Investor Services team on 13 29 39. Investment decisions should not be made upon the basis of the Fund’s past performance or distribution rate, or any ratings given by a rating agency, since each of these can vary. In addition, ratings need to be understood in the context of the full report issued by the rating agency itself. The information provided in the document is current at the time of publication.

Chad Padowitz
Co-Chief Investment Officer
Talaria Asset Management

Chad is the Co-Chief Investment Officer and co-founder of Talaria Asset Management. He has more than 20 years’ experience in the financial services industry in the UK, South Africa and Australia. Talaria's investment strategy seeks to increase the...

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.