Investment Q&A from our Scotland charity webinar
In this blog, our Head of Charities (Scotland), Gair Brisbane, follows-up on some of the more detailed investment questions posed during our charity webinar on 11th June.
“We are a charity that relies (to an extent) on dividend income to support our grant-making capacity. Looking forward, roughly what sort of percentage fall in dividend income should we be predicting in order to budget for the coming year?”
“The points about a recovery in share prices matters little in relation to the collapse in dividend income, bond yields and interest rates which charities are seeing. We rely on income to fund our outgoings. I have seen estimates that UK dividend payments will fall by 25% to 50% this year. Central banks are suggesting they will keep interest rates and bond yields low for years. Doesn't this mean that a charity's investments are going to be materially lower for the foreseeable future?”
I appreciate that portfolio income is very important for many charities. Central banks are signalling that rates will stay low for the foreseeable future, which will clearly put a squeeze on expected returns. We assess that our portfolio incomes are likely to drop by around 10-15% from the yield at the end of 2019. So, if the yield was 3.0% in your 31st December 2019 valuation then we expect that to drop to around 2.55% to 2.70%. Our assessment is based on the companies that we hold in our charity strategies, the declared dividend cuts and the projections made by Bloomberg. Inflation is also expected to remain low, which reduces one pressure, at least.
“You haven't talked about inflation, central banks around the world have been printing more money than any time before and historically central banks get rid of their debt by inflating it away, what's your view?”
You are absolutely right that central banks would normally be happy to have inflation running at or slightly over their target (normally around 2%) to erode national debt but I cannot see this being possible for the foreseeable future. Fed Chair Powell intimated this week that he will keep rates low, being mindful that the Global Financial Crisis was exacerbated when cheap debt became unserviceable due to rising interest rates. I do not think that we will see a return of austerity and there is unlikely to be meaningful inflation so I am genuinely interested to see whether taxes increase for the middle and higher earners or if countries just accept an extra zero or two on their national debt.
“As trustees we have been asked to forecast returns 10 years ahead, what would your guestimate be for a balanced portfolio annualised return over 10 years?”
Clearly trying to forecast in normal times is challenging and given that we are going into/already in a recession due to events which are unprecedented then I would not like to pin my colours to the mast at this point in time. However, thankfully the very clever people at Aberdeen Standard Investments have a forecaster tool which does just that. The link is https://aberdeenstandardforecaster.com/forecaster#
“Equity markets up 10% over the last 4 or 5 weeks yet we are being told that we are going into the worst recession in living memory with mass unemployment and companies closing around the world. Has the market become too optimistic about a V shaped recovery?”
Yes. We have been expecting more of a “U” shaped recovery and possibly a Nike swoosh shape. Significant secondary Covid-19 outbreaks could change this to a “W” shape. I think that you are right and that markets have been overly optimistic which means that we should enjoy the rebound while it lasts but not be surprised when sentiment turns again (NOTE: this answer came before the market dropped later on day of writing!)
Gair Brisbane, Head of Charities (Scotland), Aberdeen Standard Capital