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The case for global equity income funds

The rising number of dividend-paying companies in what have traditionally been growth-oriented sectors means investors no longer need to rely on the UK Equity Income sector for yield.

By Jenna Voigt, Features Editor, FE Trustnet
Thursday March 07, 2013


Global equity income funds are quickly gaining traction as investors look to diversify their income stream.

An increasing number of companies from around the globe are now paying out sustainable and rising dividends, meaning that investors no longer need to rely on the UK market for equity income exposure.

ALT_TAG Andrew Jones (pictured), co-manager of the £622.3m Henderson Global Equity Income fund alongside Ben Lofthouse, runs a diversified global equity income portfolio, which derives 75 per cent of its income from overseas markets.

Henderson cover all the major regions of the world in-house and benefit from the expertise of the dedicated income teams who focus on Asia, US, Europe as well as the UK.

"We can find income in a lot of markets at the moment," Jones commented. "Other markets are developing their dividend cultures and growing their dividends well."

Despite economic uncertainty, the majority of developed markets are forecasting dividend growth in real terms, making income an even more attractive place to be.

The four crown-rated Henderson Global Equity Income fund has been a strong performer in the sector over its brief history and is yielding 3.4 per cent – roughly average among its peers.

Jones says the team takes a bottom-up view when considering companies to put in the globally focused portfolio, and looks at three factors in particular:
  1. Absolute level of income
  2. The ability to grow dividends
  3. Fundamentals – the company is in a good market and has a solid management team
One sector that especially appeals at the moment is the pharmaceutical sector, where the portfolio owns shares in companies such as US-based Pfizer and Swiss giants Roche and Novartis.

“The fundamentals are robust, dividend outlook is encouraging and valuations are appealing in pharma right now,” he said.

Jones adds: “Another area the managers are looking for income in is the technology sector, which is currently increasing returns to shareholders. Texas Instruments and Microsoft are not traditional income stocks but have recently been raising dividends significantly.”

Like his UK equity income counterpart, FE Alpha Manager James Henderson, Jones is adding to his banking exposure because of improving fundamentals.

"Banks have already suffered dividend cuts and a lot of the effects of these have run their course," he said.

Jones says the majority of the companies in the portfolio are blue chips.

"Larger companies are where we’ve been able to find value," he said. "There’s good value with decent yield in larger cap companies internationally."


Among the fund’s top holdings are Vodafone, General Electric and German chemical giant BASF.

The manager says he is prepared to look further down the market cap spectrum if he finds attractively valued stocks with the ability to grow their dividends.

As well as direct holdings in Asian equities, there is additional exposure to the continent through stocks such as UK-listed life assurance company Prudential, and Crown holdings, the Australian-based gaming group which owns casinos in Macau as well as in Australia.

Jones has been searching for names to add to the single stock he holds in Japan – telecommunications giant NTT – but the challenge is finding high-yielding opportunities.

NTT is currently paying out 4 per cent, a level Jones says is high for the country.

"The problem we’re having in Japan is the dividend yield is quite low compared with other parts of the global market," he said.

The manager says he currently holds no utilities, though it is traditionally a higher yielding area.

“I’m worried in general across a lot of territories. Regulation has generally been tough for utilities,” he said.

Jones says share prices have been so bad in the sector in recent years that it might be time to start looking at picking up holdings at cheap valuations.

However, he says utilities in the US are a different story.

“In the US it’s a different problem,” he said. “Utilities got overbought and valuations aren’t at all attractive.”

Henderson converted its existing Henderson Higher Income fund into the internationally oriented mandate in May last year.

Since then, it has achieved top-quartile returns of 27.1 per cent compared with 22.74 per cent from the IMA Global Equity Income sector.

The MSCI World index picked up 24.12 per cent over the period.

Performance of fund vs sector and index since mandate change

ALT_TAG

Source: FE Analytics

The fund has performed in line with the MSCI World index in terms of volatility, with an annualised figure of 10.34 per cent.

The index scored 10.61 per cent, according to FE Analytics.

Henderson Global Equity Income requires a minimum investment of £1,000 and carries a total expense ratio (TER) of 1.74 per cent.

Jones was joined on the portfolio by Lofthouse last year, a move which he says has benefited his process.

"I find it very useful coming up with ideas," he said. "We have to agree on ideas and if we don’t agree, it won’t go in the portfolio."



 
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dexi Mar 08th, 2013 at 01:16 PM

A funds total return is what matters at the end of the day.Those that pay out more than the average ( 4 % or thereabouts )tend to underperform over the long term.Personally I aim for a ratio of 60-40 income-growth split in my portfolio.

Reply
Ilmarinen Mar 08th, 2013 at 12:17 AM

It would be interesting to hear which UK and Asia Pacific (in the UT sector presumably for you) funds you particularly favour for income, Theo. In my own case I invest in Aberdeen Asian Income IT. It was a toss-up between it and Schroder Oriental Income IT.

Reply
Theo Mar 07th, 2013 at 08:58 PM

With few exceptions, I only invest in income funds because income is here and now increasing my sense of security, enabling me to re-invest when and where I wish, while future growth is pie in the sky.

As far as I can see the only sectors with funds offering good income (above 5%), good past performance (3-5 crowns) and good managers (FE alpha grade), are UK Equity Income and Asia Pacific. All the rest is title tattle which I read for diversion.

I advise readers to set their own targets and do broadly the same.

Reply
Rob Gleeson Mar 22nd, 2013 at 12:55 PM

Don't forget capital growth artificially depresses yield statistics. Yields quoted are calculated against the price on the day the dividend was issued, whereas what is relevant is the yield against the price you paid.

For example, a fund that pays out consistently 5% will be paying out more £££s as its price increases. The price you paid stays the same obviously, so your yield increases.

Low yielding funds with decent growth potential can become high yielding funds for the investor, even though the official yield figures will remain the same.

Reply
Law Man Mar 08th, 2013 at 02:06 PM

Re Theo's criteria, with high share prices, it is becoming hard to generate over 5% p.a. yield. Indeed, much over 5% can be a warning sign: see e.g. Aviva.

I like (slightly) higher dividend rates because it can be a sign of stability in the company. I do not need the £p income, and reinvest it.

USA and Europe are unattractive for dividend payees due to the irrecoverable "withholding tax"; so Theo is right that UK and Asia are the places to look.

Reply
dlp6666 Mar 08th, 2013 at 02:25 PM

Can the effect of 'witholding tax' be eliminated or reduced at all?

I thought there was some form that could be completed?

Reply
Mickey Mar 23rd, 2013 at 04:30 PM

Indeed you can, the one I filled in was called W8 something or other, probably the one mentioned here http://www.ft.com/cms/s/2/7bfea4ce-c27d-11df-956e-00144feab49a.html#axzz2ONgoKiyh

Reply
Dobbo Mar 07th, 2013 at 11:23 PM

I do like your comments Theo, they're to the point but have good advice embedded in them.

Reply
dlp6666 Mar 08th, 2013 at 01:14 PM

Ditto, Dobbo.

Reply
 

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