Increased diversification in income investing in 2008

Financial advisers in the UK plan to diversify their income investments across the markets in 2008 according to research commissioned by Scottish Widows Investment Partnership (SWIP).

While the percentage of advisers expecting to invest in UK income funds on behalf of their clients in 2008 remains high at 79%, over a third (37%) of advisers are looking to Europe, and 17% to the Far East, for income opportunities. The results demonstrate recognition among advisers of the increased opportunities for income generation outside the UK.

A third of advisers (33%) expect to increase their income investment exposure to Europe this year. The UK Equity Income sector was the third top selling IMA sector in 2007. With dividends increasing in continental Europe, SWIP expects to see demand increasing among UK advisers for income outside of the UK.

Only 7% of advisers don’t intend to invest in income funds on their clients’ behalf in 2008.

Looking at the wider market outlook, advisers are showing increased caution this year according to the research. Only 19% expect global equity market returns to be higher this year than in 2007 and only 16% are willing to take on more risk in order to meet client’s yield expectations compared to 2007. In contrast, almost a third (30%) intend to decrease exposure to risk for their income-invested clients in 2008.

Half of advisers expect yield levels of between 3% and 4% in 2008, with 20% of advisers’ expectations resting between 4% and 5% and only 9% predicting yields above 5% in 2008.

Steven Maxwell, Head of European Equities at SWIP comments: “It is positive to see that advisers are looking to spread their income investments this year and are recognising the increased opportunities for income generation outside the UK. Given the levels of yield-growth at present in mainland Europe and beyond, we expect to see an increasing trend of income diversification over the next few years. Dividends in continental Europe have been growing at a faster rate to the UK and, by adding a European income fund to their existing UK income exposure, investors can benefit from greater diversification and therefore reduced risk.

“The opportunities in mainland Europe are being driven by a cultural shift in dividend policy. European companies have typically focused on capital growth and reinvested earnings historically. However, the demands from European investors for income is increasing and this has encouraged a meaningful change in the way European companies manage their capital and balance sheets.”