After low income distributions for nearly two years, trust income beneficiaries and others dependent on investment income would have been pleased to see a higher distribution in their June 2021 remittance. While not reaching the levels we saw in 2019, investment income increased thanks to a strong share market performance and subsequent dividend payments. Very low interest rates will continue to hold back income distributions for some time, but despite this we are likely to see income returns gradually move back towards pre-COVID levels in future quarters.

Why has my June 2021 quarterly remittance been higher than previous quarters and will this continue?

Income levels always vary from quarter to quarter and this will continue in the future. The June quarter is always the highest distribution of the year as it aligns with the quarter where most Australian companies pay their largest dividend payments.

In the future, it’s likely that income distributions will slowly move upwards, back towards the levels we saw in 2019. Just as we are still dealing with the pandemic, but getting better at managing it, so too are economies.

Were the high income distribution levels from managed funds in the June 2021 quarter a result of accumulated income from the previous year?

No. The main reason for higher income distribution in the June 2021 quarter was higher dividend payments from Australian companies, led by the banks, due to their strong economic performance in the 2021 financial year.

Given the impressive success of government and central bank stimulus measures, companies have felt more confident in their financial position and so felt more comfortable paying out higher dividends.

Was income withheld in managed funds during the previous year, to offset capital losses and other losses within the funds?

No, we have not been holding back income from beneficiaries. We realise how important income is to beneficiaries, particularly at times like this with lower income levels, so we have been distributing all income as soon as we can.

The main reasons for lower income distributions in 2020 were:

Companies distributing lower, or no, dividends. Many companies responded to the economic shock caused by COVID by distributing lower levels of earnings. Companies wanted to make sure they had enough cash in reserve to be able to navigate the ongoing economic turmoil, so many companies distributed lower dividends, or didn’t distribute any dividends at all. Also, Australian banks and insurers were constrained from paying dividends in 2020 by the Australian Prudential Regulation Authority (APRA). APRA removed this constraint late in 2020.
Continued low interest rates. One of the impacts of low interest rates is lower income from all asset classes, particularly cash and bonds.
How has Perpetual Private’s style of investing protected trust assets during the last 18 months from the impact of COVID-19?

Our focus on long-term performance, and the quality and value of the stocks we invest in, meant that we were somewhat protected when markets fell during the COVID-driven economic shock. While we were not entirely sheltered, our investments broadly suffered less and rebounded more quickly than others in the market.

At Perpetual Private we also actively manage our clients’ share portfolios. Actively managed share portfolios have an advantage over more passive funds (like index tracking funds) when equity markets are more volatile, as astute managers can take advantage of different opportunities that emerge. Over the past 18 months our investment managers were able to transition our clients’ investments from companies that benefitted from the global lockdowns, and so their share prices and valuations were very high, to cheaper and less popular investments which were more closely engaged with reopening economies. These cheaper investments then performed better, comparatively, as economies reopened.

Are you able to provide any commentary in relation to Perpetual Private’s performance against benchmarks?

Over the past few years highly accommodative central bank policies have been driving markets higher and higher, resulting in most shares increasing in value, with little divergence in performance between different types of shares. For active managers like Perpetual Private this has made it difficult to add significant value to investment performance. In more recent times COVID has caused different parts of the economy, and different countries, to perform in distinctly different ways. This has allowed our active managers to drive outperformance with astute investment selections.

What is the expectation for income returns over the remainder of this financial year?

This will depend heavily on the progress of the economic recovery from COVID, but we certainly expect income returns to continue to head towards 2019 levels of income. If the recovery continues and builds in strength, it’s likely that we will see interest rates increase in the medium term. This is an important factor for increasing income returns, because it will mean that income will be shared more equally among different asset classes. Right now, equities are providing most of the income returns, but if interest rates increase then returns from other asset classes, like bonds and cash, will also increase.

Originally published by Andrew Garrett, National Investment Specialist at Perpetual Private