MEDIA RELEASE: The importance of income in investment portfolios as a proportion of overall returns will be magnified as we head into 2023, says Talaria Asset Management Co-Chief Investment Officer, Hugh Selby-Smith.
Selby-Smith says it’s clear that global markets are transitioning away from a period of elevated capital growth driven by historically high asset prices. In this environment, he believes the importance of income will become more prominent in 2023.
“Income matters and always contributes to returns, but capital doesn't actually contribute every decade. In fact, in the S&P 500, there's been three – the 1910s, 1930s and more recently the 2000s – where investors had no return from capital appreciation,” Selby-Smith says.
“The importance of income usually increases after a period where capital gains have been very strong. The most recent period is certainly one of those environments.
“This leads us to believe that the 2020s is very likely to be a decade where capital gains will be a far lower contribution of return, highlighting the importance of income.”
With capital contributing less to investment returns, Selby-Smith points to two things that will signal a bottom in capital markets in 2023: the first is when leading economic indicators trough, allowing investors to anticipate a recovery in the economy and corporate earnings, while the second is when central banks change to policies that support capital markets. He also notes that a slowing pace of interest rate rises does not constitute a central bank change of policy.
“The established relationships between interest rates, leading economic indicators, and corporate earnings point towards falling profitability into the second half of 2023, which will negatively impact markets,” Selby-Smith says.
“2022’s moves in equities have rammed home the importance of risk management. For investors, this means avoiding assets that magnify market moves, owning assets with shorter rather than longer payback periods, and selecting funds that consistently deliver positive results. On a regional basis, markets outside the US offer better prospective returns given lower starting valuations.”
If there is an opportunity for investors to rebalance their portfolios, Selby-Smith says they should take it as it will continue to be a dangerous time to be adding risk in 2023.
“One of the keys to wealth creation is holding on to as much of it as possible in down markets so that capital can then work for you when things improve.
“Amid high inflation, it pays to own assets that allow you to recoup your investment sooner rather than later. This is because with inflation increasing, a dollar now is worth more than a dollar in the future, Selby-Smith says.
“Monetary authorities around the world will not be loosening financial conditions any time soon as they try to fight spiralling inflation, meaning investors must position their portfolios accordingly.
“Our experience over more than 17 years has reinforced our view that there are other ways for Australians to generate greater certainty of investment income returns beyond the well-worn approach of harvesting fully franked dividends from ASX stalwart stocks.
“Our approach to global equity investing has provided over 9 per cent per annum average income distribution as part of the total return of 10.6 per cent for the last 10 years, with relatively low volatility and lower market risk.”
