27th February 2014
Historically investors seeking an income from their stock market holdings would have simply used a UK Equity Income fund. UK companies had a long history of paying high and growing dividends and it was difficult to find a similar dividend culture in other markets. But that is changing as more businesses around the world adopt the practice.
Investment journalist Cherry Reynard looks at the options.
Dividend paying companies in the UK have tended to be confined to a few sectors, which is fine if an investor wants stodgy blue chips in the oil, telecoms or utilities sectors, but not so good if an investor wants greater diversification. Global Equity Income funds have become popular as investors have sought greater diversity of income, and exposure to companies around the world. At the same time, more global companies now pay dividends, giving global equity income managers a greater choice.
Range of funds
The Global Equity Income sector is relatively new. Most of the funds have a track record of less than five years. However, there is increasing choice for investors as more fund management groups launch funds of this type.
There are plenty of different approaches on offer within the sector. For example, some funds may prioritise an absolute level of dividends, only investing in those companies with a dividend of, say, 5% or higher. Others may prioritise companies that are growing their dividends, which may mean investing in companies currently paying a lower dividend level where the manager expects it will rise. Some may take a bar-bell approach, investing some companies with a very high dividend and some ‘growth’ companies paying little or no dividend.
Fund managers will also differ on the extent to which they take macroeconomic factors into account when making their investment decisions. For example, some will look at strong economic growth in the US and aim to find companies benefiting from that growth, while others may take a purely stock-picking approach, looking for the best global company in each sector.
Some managers will try and time the business cycle, moving into more economically sensitive companies as the business cycle is expanding, or more defensive companies in a recession. Others simply try to pick the best companies and hold them through the cycle.
Funds will also vary in the extent to which they follow an index. Some funds will aim to stick close to their benchmark index – usually the MSCI World index. This tends to leave them with a high weighting in the US, which is over 50% of the MSCI World market capitalisation. Others will be more ‘unconstrained’, and have the flexibility to move away from benchmark weightings. There can be a significant variance in the income paid. Some funds pay as little as 2%, while others may pay as much as 5%. Investors needing a higher income should ensure they target funds that have paid a high income historically.
Over the past three years, the average fund in the Global Equity Income sector has grown by 27.5% (to 20th February). Only a handful of funds have a five year track record, but the average rise is 93.1%. There are also a number of investment trusts that take this approach, which sit in the AIC Global Equity Income sector. The average fund in this sector is up 126.6% over five years and 33.3% over three years. This compares to average growth from the Global sector of 19.3% over three years and 87.6% over five years.
Top of the sector over three years is the Artemis Global Equity Income fund. Manager Jacob de Tusch-Lec has combined judicious country selection with flexible stock-picking and has managed to call the shift in market sentiment correctly. Standard Life Investments, Liontrust and Legg Mason also stand out. On the investment trust side, the Scottish American Investment Company, managed by Baillie Gifford is the stand-out performer.
The weakest funds have either been those that have remained too defensive, investing in sectors such as tobacco, or have been too heavily weighted to emerging markets, which have sold off significantly since the start of the year.
When does the sector perform well/badly?
Companies that pay dividends tend to larger and more established. While it is possible to fudge growth numbers, a dividend is tangible, giving investors something in their pockets. As a result, income funds tend to do better when investors are more cautious, while more growth-orientated funds will do better when investors are more optimistic. Over the past five years, in aggregate, global equity income funds have performed better than global funds.
What sort of investor does it suit?
A global equity income fund will suit those investors who want to look outside their domestic market for income, but do not want to start selecting between Europe, or the US, or emerging markets. A global fund is likely to provide some exposure to a broad range of markets and sectors, and provide a ‘one-stop shop’ for an investor’s non-UK exposure. It will help diversify an investor’s income stream away from the dominant income sectors in the UK such as oils and tobacco. Investors must be willing to take risksbeyond those of a conventional UK equity income fund. Global funds come with currency risk, for example, and the underlying companies held by fund managers may not be as well-known.
How much of a portfolio for low/mid/high risk investor?
The majority of investors will have UK growth and income funds, or multi-asset funds at the core of their portfolios. They may then look to global equity income funds to provide diversification. Those willing to take more risk may have a higher exposure. That said, global equity income funds offer a broad variety of options.
Top 10 by performance (3 year) – Global sector
Artemis Global Income
Invesco Perp Global Equity Income
Legg Mason Global Equity Income
Liontrust Global Income
Standard Life Investments Global Equity Income
Newton Global Higher Income
Guinness Global Equity Income
Schroder Global Equity Income
Threadneedle Global Equity Income
Martin Currie Global Equity Income
Key questions to ask
Do I want to be in large, blue-chip companies?
Do I want a manager who incorporates a lot of macroeconomic analysis?
Do I want a manager who invests in emerging markets?
Do I want a manager who targets a high or growing income?
Do I want a fund that will stick close to the index?
Do I want to invest with a large fund group, or with a boutique group?
Adviser comments and their suggested funds
Damien Fahy, Head of Research, FundExpert.co.uk
There are seven times as many dividend-paying stocks outside of the UK as there are in it with some of the exciting long term opportunities in Asia and the emerging markets. The growth in global equity income fund payouts was disappointing in 2013 but companies around the world now have significant cash piles, which should be positive for future payout growth as corporate confidence returns.
We like Artemis Global Income – Unlike his defensive focused peers, Jacob has exploited value opportunities within mid-cap companies. Buying companies with good cash flows which have increased or reinstated dividend payouts has not only boosted payouts (up over 8% in 2013), the fund’s total return in 2013 has comfortably outperformed even the very best of global growth funds.
Gavin Haynes, investment director, Whitechurch Securities
Global equity income is now a core area for stockmarket investing. Newton launched the first high profile retail offering in 2005 and now most major investment houses provide a fund in this area. The reasons for investing in global equity income funds are compelling. In a global economy currently dominated by low interest rates, dividend yield continues to be an important part of the total return equation. Equity income stocks in the UK have long been a mainstay within investors’ portfolios and it makes sense to diversify equity income exposure overseas.
Newton Global Higher Income and M&G Global Dividend both have excellent track records and have proved to be good long-term core holdings in generating yield and providing strong growth. Artemis Global Income is another fund that is generating impressive returns.