Most investors access UK equity income through a blue chip fund such as Neil Woodford’s Invesco Perpetual Income or High Income portfolios, or Artemis Income. There are also a number of equity income funds in the UK that invest further down the market cap spectrum, such as the likes of JOHCM UK Equity Income and Unicorn UK Income.
The attraction is obvious. The UK is home to some of the largest, most liquid and most stable income payers in the world.
However, Andreas Zoellinger, manager of the BlackRock Continental Europe Income fund, points out that while there are 30 firms in the UK with a market cap of more than £1bn that are paying dividend yields of more than 4 per cent, Europe has more than triple the number of firms with the same qualities – 103 in total.
"European equity income is more diverse and less concentrated than it is in the UK. [European equity income] is a true alternative for investors looking to generate yield and return from a slightly riskier asset class in a very risk-concentrated way," he said.
"At the same time, a fund that restricts itself to only investing in companies with pre-determined yield levels can miss out on opportunity costs. For example [Finnish elevator manufacturer] Kone has an ordinary dividend yield of 2.8 per cent, which is below the market average. However, it is a very high-quality company with an excellent business model."
The manager says what is more important is that the company has grown its dividend consistently for the last five years.
He adds that Kone has picked up so much cash it has paid out two special dividends in the last three years – something that would not be captured by the ordinary dividend yield barrier.
"Investors remain underweight European equities in spite of inflows after Mario Draghi’s comments last year. It’s still an unloved asset class, which is always a good start for investors."
"Don’t be afraid of Europe. It offers good inflation protection and in a world where interest rates remain low, but volatility is high, equity income will be a winning strategy and there are a number of European companies that can provide both a dividend yield and dividend growth."
The £150m fund has performed well over its brief history. Since launch in May 2011, it has returned 25.98 per cent, more than doubling the returns of the IMA Europe ex UK sector and nearly quadrupling the returns of the FTSE Europe ex UK index, which made 5.76 per cent.
Performance of fund vs sector and index since launch
Source: FE Analytics
Zoellinger says the fund aims to provide a steady, reliable and growing long-term income stream. It is yielding 3.75 per cent.
Although the fund is benchmarked against the FTSE Europe ex UK index, the manager says he and co-manager Alice Gaskell have the ability to move significantly away from the benchmark to deliver income.
He stresses a key element of the fund’s strategy is keeping a lid on volatility relative to its peers and to do this they focus on quality companies and have an absolute return mindset, although the fund is a long-only product.
Over the last two years, the fund has managed a lower annualised volatility score than both the sector and index, at 15.43 per cent.
The pair remain wary of some of the more cyclical sectors in Europe, including banking and mining stocks.
Although they started adding to financials last year, they avoided banks and picked up insurers instead. However, the team bought its first bank in the Continental European Income fund in “quite a while” earlier this year.
The fund requires a minimum investment of £500 and has ongoing charges of 1.7 per cent.
Richard Troue, analyst at Hargreaves Lansdown, says that while he has found a number of managers who excel in the European growth space, there are not many that stand out on the income side.
"We favour global income funds where the manager has the flexibility to select the best opportunities around the globe," he said.
Troue adds that Hargreaves Lansdown has dipped into Asia to get access to the growing dividend story in the region; however, he says the recent strong performance from the BlackRock fund could mean it is coming into its own and should be one to keep an eye on.
"There is some concentration risk in having all your income exposure in the UK," he said.
Troue says with the returns from cash all but drying up, investors that can afford to take on more risk to get capital returns are turning to equities in the UK, US and Europe. He adds that diversifying your income stream is important should one region perform poorly in a given market condition.
