A number of themes continued to guide portfolio changes during the third quarter. Chief among them was a cautious view regarding the outlook for dividends both at home and abroad. Various metrics suggest dividends may not recover to 2019 levels for some years to come. And with the number of Covid-19 cases now increasing again, questions remain regarding the strength of the economic recovery. This helped to explain the portfolios’ reduction in exposure to mainstream equity income trusts.
In part to compensate for the loss of income, while also focusing on the sound fundamentals, the portfolios increased their exposure to the commodities and healthcare sectors. As highlighted in a recent column, a combination of demand and supply factors, together with a sector producing record free cash flow after a difficult decade of restructuring, suggests optimism – particularly for the mining companies.
Meanwhile, the healthcare sector is set to continue to produce superior returns, in large part because "the healthcare systems of the developed world are fundamentally broken and need to be made fit for purpose in the 21st century as the population ages and ever more of us live with chronic medical conditions" (BB Healthcare Trust). Any short-term volatility courtesy of the US election in November should not mask the sound long-term fundamentals, particularly given demographic trends and scientific advances.