Looking outside of the UK for income is becoming a popular strategy with investors and advisers alike.
As FE Trustnet recently reported, if you include the M&G Global Dividend fund, which is actually in the IMA Global sector, global equity income funds outsold their UK counterparts in December.
However, while many fund managers do hold global equity income funds, our study suggests that they still form a much smaller part of the professionals’ portfolios.
For example, Artemis Income, the most popular UK Equity Income fund with managers, crops up in 57 top-10s, while only 18 managers hold Veritas Global Equity Income among their favourites.
Source: FE Analytics
Nevertheless, there are a number of high-profile managers that have high exposure to the Veritas fund, including FE Alpha Manager Bill McQuaker.
He and his multi asset team hold the portfolio in their Henderson Multi Manager Distribution and Henderson Multi Asset Income & Growth funds.
It is also FE Alpha Manager David Coombs’ seventh-largest position in his Rathbone Multi Asset Total Return Portfolio, making up 3.5 per cent of assets under management.
It isn’t too difficult to see why Veritas Global Equity Income – which is headed up by the FE Alpha Manager duo of Andy Headley and Charles Richardson – is so popular with other managers.
The fund was launched in February 2005 and, according to FE Analytics, has been the sector’s best performing portfolio over that time with returns of 124.78 per cent.
It has also beaten its benchmark – the MSCI World index – by close to 30 percentage points in the process.
Performance of fund vs sector and index since Feb 2005
Source: FE Analytics
However, its relative performance hasn’t been as strong more recently, as it has underperformed against its benchmark over one, three and five years.
It must be pointed out though that the primary driver of that underperformance could be due to the manager’s high exposure to basic material stocks, which have been very out of favour recently.
The fund returned 10.8 per cent in 2013 while the index returned 24.32 per cent.
The Veritas fund, which is domiciled in Ireland, has a yield of 4 per cent and pays out its dividend twice a year. The managers obtain that income from a portfolio of just 29 holdings.
Their largest regional weighting is to Europe and they count the likes of ENI, Statoil and Roche in their top 10.
FE Alpha Manager Stuart Rhodes’ M&G Global Dividend portfolio is the next most popular global equity income fund, although it is a member of the IMA Global sector because the manager doesn’t want to be constrained by the sector’s yield characteristics. Instead he wants to focus on finding a growing source of income.
The £8.8bn fund is a top-quartile performer – and has beaten its MSCI AC World benchmark – since its launch in July 2008 and over cumulative three- and five-year periods.
It yields 3 per cent.
The Jupiter Merlin team of John Chatfeild Roberts, Algy Smith-Maxwell and Peter Lawery (all of whom are FE Alpha Managers) are Rhodes’ most notable investors.
The fund is a top-10 holding in their Jupiter Merlin Balanced, Conservative and Income Portfolios. M&G Global Dividend is their largest holding in their Income Portfolio, making up 14.3 per cent of assets.
James Harries' £2.9bn Newton Global Higher Income also features on the list, with 10 funds of funds counting it as a top-10 holding.
The study also included yielding funds from the IMA North America, Japan and Europe ex UK sectors as many managers prefer to use regional income funds to diversify out of the often concentrated UK dividend-paying market.
The research showed that BlackRock Continental European Income is a firm favourite.
The £240m fund, which is co-managed by Andreas Zoellinger and Alice Gaskell, is a top-10 holding with 15 funds of funds, despite the fact it was only launched in May 2011.
It has, however, performed very well over that time.
Our data shows that it is the third best performing portfolio in the IMA Europe ex UK sector since its launch, more than doubling the returns of its FTSE World Europe ex UK benchmark in the process.
Performance of fund vs sector and index since May 2011
Source: FE Analytics
The Architas team is clearly a fan of Zoellinger and Gaskell’s fund, holding it in six funds of funds.
FE Alpha Manager Will James’ Standard Life European Equity Income fund is also on the list, cropping up in 10 multi managers’ top-10 holdings.
The Japanese and the US equity markets are not renowned for their income potential. However, the study showed that a number of fund of funds managers like to diversify their income stream by using yielding funds from those sectors.
For example, 14 of them count Jupiter Japan Income as a top-10 holding and nine of them have decent exposure to the JPM US Equity Income fund.
Both portfolios have underperformed against their relevant sectors over five years and only yield 2.1 per cent, however.
