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.
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:
- Absolute level of income
- The ability to grow dividends
- 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
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."