| 01/01/2023 - 31/12/2023 | 01/01/2022 - 31/12/2022 | 01/01/2021 - 31/12/2021 | 01/01/2020 - 31/12/2020 | 01/01/2019 - 31/12/2019 | |
|---|---|---|---|---|---|
| M&G Equities Investment Fund for Charities (Charifund) Sterling Acc | 3.63% | -0.20% | 19.05% | -12.89% | 22.99% |
| FTSE All-Share Index | 7.92% | 0.34% | 18.32% | -9.82% | 19.17% |
UK equities could offer refuge for charities seeking higher income
06 February 2024
Charities battle rising costs
Like many individuals and institutions, the sharp rise in inflation over the past two years has left many charities struggling to meet the rising costs of running their day-to-day operations. Many are worried about wages, rents, lease payments, and other expenses, while also facing growing needs from their beneficiaries due to the cost of living crisis. It is therefore becoming ever more important for charities to have stable and potentially increasing cash flows to deliver on their objectives.
Many charities rely on investment income to meet these demands. Higher interest rates have gone some way towards helping, but the income received from cash and government bonds remains below inflation. This means charities must look elsewhere to keep up with their rising costs, while at the same time being cognisant of the capital value of their investments rising with inflation.
UK equities could offer a significant income premium
The UK equities market is consistently one of the strongest dividend payers globally, with UK-listed companies forecast to pay out £100bn in dividends in 20241. Compared to its international peers, the UK market could offer a significant income premium, with the FTSE All Share having provided a dividend yield of 4.02% versus the MSCI ACWI global index’s 2.03% and the US S&P 500’s 1.53%2. Many UK companies could offer a higher yield still. While investing based on dividend yield alone is not a robust strategy – a high yield might be the result of the market’s belief that the dividend will be cut in future – the ability of UK companies to maintain and grow their dividends appear to be secure. This is evidenced by the dividend cover on the FTSE All Share, which at a healthy 2.45x, remaining steady from 2022’s figures, and up from 2x in 2021, and 1.4x in 20203.
The value and income from a fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested. Please note, past performance is not a guide to future performance
Another important consideration is the diverse sources of revenue available to UK companies. UK-listed firms derive around three-quarters of their revenues overseas, thanks to the prevalence of major international companies such as BP, Shell, HSBC, and GSK. This means the market as a whole can perform independently of the UK’s domestic economy, with international revenues supporting these companies’ ability to pay growing dividends.
Figure 1. Dividend yield differential – UK vs. global equities
Source: Bloomberg, 30 November 2023, data is presented as the difference between the rolling one-month dividend yields of the FTSE All Share and the MSCI World Index
UK market appears relatively well-placed for higher interest rates
The composition of the UK equity market is arguably better suited to higher-for-longer interest rates than many of its international peers. This is due to its relatively large exposure to industries that can potentially do well in this environment, such as financials and energy companies. Banks, for instance, typically make higher margins when lending at higher interest rates, while commodities can act as an inflation hedge or even drive inflation, as we have seen over the past two years. Conversely, higher-for-longer interest rates can act as a headwind for sectors such as technology, to which the UK has low exposure, as investors are less willing to pay a premium for their potential future earnings growth.
Figure 2. UK relative valuation chart vs MSCI world
Compelling valuations
Source: Panmure Gordon, MSCI, Refinitiv. *Blended (equal weight) average P/E, EV/EBITDA and P/B *GBP for UK and World to 31 October 2023
Although income generation is an ongoing priority for many charities, what ultimately matters is total investment return – in other words, the combination of income and capital returns. While the UK has underperformed with regards to the latter compared to other regional stock markets in recent years, UK equities have been trading at a historical discount compared to global peers, as can be seen in the chart above. This discount is also evident on a sector-by-sector basis, i.e. it is not simply a result of the UK market’s composition. We believe the extent of this valuation discrepancy is such that it is unlikely to persist over the long term, which presents a potentially compelling opportunity.
In tandem, UK plc is showing resilience from a fundamental perspective. Over the last five years, companies in the FTSE All Share Index have seen earnings grow by 47%, while profit margins have grown by 6%4. Once we combine this with the relative discount the UK is trading at, we’re faced with a compelling picture, and perhaps an opportunity.
Charifund
At M&G, we have a flagship UK equity income fund designed specifically for charities. Charifund was launched in 1960 and today helps over 8000 charities meet their ongoing funding needs. Charifund’s yield currently sits at 6.08% vs the FTSE All Share’s yield of 3.96%, offering a 53.5% premium5. The fund is available to all charities in the UK. If you are interested in speaking to us about investing in Charifund, or any of the funds we offer, please contact the charities team at [email protected], or alternatively visit our website for more information: https://www.mandg.com/investments/charities/en-gb
Past performance is not a guide to future performance
The benchmark is a comparator against which the fund’s performance can be measured. The index has been chosen as the fund’s benchmark as it best reflects the scope of the fund’s investment policy. The fund is actively managed. The fund manager has freedom in choosing which assets to buy, hold and sell in the fund within the constraints set by the objective and investment policy. The fund’s holdings may deviate significantly from the benchmark’s constituents.
Source: Morningstar, Inc and M&G, as at 30 December 2023. Returns are calculated on a price to price basis with income reinvested
The fund can be exposed to different currencies. Movements in currency exchange rates may adversely affect the value of your investment.
Further details of the risks that apply to the fund can be found in the fund's Prospectus.
The views expressed in this article should not be taken as a recommendation, advice or forecast.
1Baden Hill, Bloomberg, FactSet, 11 July 2023. Based on estimate dividend announced data.
2Bloomberg, 30 November 2023.
3Bloomberg, 30 November 2023.
4Bloomberg, 30 November 2023, values used in analysis were year end 2018 figures and forecasted 2023 year end values.
5M&G, LSEG, as at 30/11/2023, income share class.
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