Global income diversification myth exposed
More and more investors are looking outside of the UK for income, but funds they expect to provide them with diversification are often exposed to the same stocks.
By Mark Smith, Senior reporter
Monday August 06, 2012
Five of the 12 most popular companies held by Global Equity Income
managers are also favourites in the UK income sector, the latest FE Trustnet research shows.
According to FE data, FTSE giants Royal Dutch Shell, GlaxoSmithKline, Vodafone, British American Tobacco and HSBC all feature high up the list of the most held stocks in the IMA’s youngest sector.
Most popular stocks in income sectors
Source: FE Analytics
| UK Equity Income
|| Global Equity Income
|| Philip Morris
|| Reynolds American
|| Merck & co
| Imperial Tobacco
Global Equity Income is among the most fashionable story in the investment management industry at the moment. Funds such as M&G Global Dividend
and Newton Global Higher Income
have been among the most sold investments in the entire IMA universe over the last three years.
The story is often sold to investors on the guarantee of broader exposure away from the banks, tobacco, oil, telecom and utilities companies that make up the UK index.
However, our research suggests that many of those invested in the Global Equity Income sector are likely to be heavily exposed to the same handful of companies that are prevalent in UK Equity Income funds.
While Tim Cockerill, head of collectives research at Rowan Dartington, believes global managers are justified in their stock positions, he agrees that investors searching for diversification from their UK holdings may be left disappointed.
“Managers of global equity income funds have a universe of international stocks to choose from,” said Cockerill. “If a company passes a manager’s test for the level of yield, the sustainability of that yield and the opportunity for growing income then he’s not going to worry if it’s in the UK or not. This is not designed as an ‘ex UK’ sector.”
“Having said that, I think there’s a space for an ‘ex-UK’ global market because we know that people are loaded up on FTSE income payers right now. While there’s very good reasons for this, there’s always a risk of having so much exposure to the same companies.”
Single-stock risk is already a significant issue within UK Equity Income portfolios. A recent FE study revealed that Neil Woodford’s Invesco Perpetual High Income fund is among those in the sector that rely on one company to deliver more than 10 per cent of their yield
While the average fund in the Global Equity Income sector has just 15.2 per cent of assets invested in the UK, the correlation between it and the UK Equity Income sector is remarkably close.
Performance of sectors over 3 yrs
Source: FE Analytics
Our data shows that the r-squared ratio – a measure of correlation where 1 indicates an exact replica and 0 signifies no correlation – between the sectors is 0.88.
In a recent interview with FE Trustnet, Gervais Williams, who heads up the Diverse Income Trust, also voiced his reservations with ‘diversified’ global income portfolios