For years, UK equity income funds have been bestsellers, and many have chugged along steadily producing annual yields of around 3-5 per cent. However, there are strong arguments for income-seekers to diversify globally, particularly at this juncture.
High-yielding stocks in the UK stand at inflated prices, and analysts are warning they may be forced to slash payouts to cut costs. Moreover, the prospect of a strengthened Conservative government after the general election has sent sterling higher, reducing the attractions of large domestic exporters, many of whom are big dividend payers.
Over recent periods the global equity income sector has consistently outperformed its UK counterpart in terms of total returns, returning 23.5 per cent over one year and 36.1 per cent over three years to 2 May, compared with 16.5 and 23.4 per cent respectively for the UK equity income sector.
Several consistently outstanding global equity income funds offer plenty of options for investors. Your choice will depend on how you wish to diversify geographically and which sectors you favour.
Yields from the US S&P 500 index are lower than those from the major European markets, which tend to average around 3.5 per cent.
Yields on Asian stocks are around 2.5 per cent a year, but they offer greater opportunity for capital gain because they are on lower valuations, with price/earnings ratios of around 15 times, compared with 35 on the FTSE All-Share index. Furthermore, Asian companies are not suffering supply cost inflation and should continue to generate the free cash to pay dividends.
But care needs to be taken when running the rule over the Investment Association’s global equity income fund sector. Some funds are heavily slanted to the US, which carries a 47 per cent weighting in MSCI’s World High Dividend Yield index; the table below shows six of the top 10 fund performers over the past three years have a weighting of 40 per cent plus. While there is nothing wrong in having a meaty position in the US, it is currently widely viewed as expensive; moreover, investors may prefer a manager that sticks less rigidly to a global index.
For those who wish to buy more than one global equity income fund, there is also the risk of putting all their eggs in the same basket. Investors should therefore look under the bonnet to ensure they are getting an adequate amount of diversification on a geographic level.
To that end, it’s worth looking out for funds that make a point of holding less in the US, including Baillie Gifford Global Income Growth and Artemis Global Income. The Baillie Gifford fund manager James Dow argues that the US does not have a culture of big dividend payments, so the fund has just 30-35 per cent in the region; but it is overweight Australia and Brazil, where the dividend culture is more entrenched.
UK-quoted global firms
Dow also likes UK companies such as WPP and Experian, which have global exposure but are quoted in London, where boards are committed to a progressive policy on dividends through good times and bad. ‘The basis of what we’re doing is trying to find companies that can continue to grow on a five-year-plus horizon,’ he says. ‘Oil companies in particular need to put billions back into the ground just to stand still. BP and Shell are so capital-intensive that they have to borrow. ’
The Artemis Global Income fund, managed by Jacob de Tusch-Lec, continues to favour Europe, where valuations are much cheaper than the US. As well as being light on US exposure, de Tusch-Lec keeps the fund’s UK content relatively low. For income investors seeking diversification, therefore, it will complement existing UK equity income holdings.
Click the table below for a larger version
Subscribe to Money Observer Magazine
Be the first to receive expert investment news and analysis of shares, funds, regions and strategies we expect to deliver top returns, plus free access to the digital issues on your desktop or via the Money Observer App.Subscribe now