In the 12 months year alone the gap is 7.8 percentage points, which extends to 8.43 percentage points over three years and almost 17 percentage points over five years.
Source: FE Analytics
There’s an even bigger divergence when looking at the top performers from both sectors. Over three years, the likes of Invesco Perpetual UK Strategic Income and Unicorn Income have returned around 60 per cent, whilst the best performing fund in the global sector – Invesco Perpetual Global Equity Income – has returned just 43.18 per cent.
Performance of funds and sectors over 3yrs
Source: FE Analytics
The stronger performance of the UK market has certainly played a part, with the natural benchmark for the UK Equity Income sector – the FTSE All Share – beating the FTSE World index over the short-, medium-, and long-term.
However, the difference in performance between the two indices is significantly less than the two sectors, suggesting other factors have played a part in the outperformance.
Rob Gleeson (pictured), head of FE Research, says that the strength of the UK dividend market plays a big factor in the better performance of UK Equity Income funds.
“Dividends aren’t overtly British, but we have the strongest culture for it by far. It’s no coincidence that many of the funds specialising it are good at what they do,” he said. “Global equity income is a relatively new concept, and a lot of the regions around the world still don’t have a very large selection of companies that consistently pay dividends.”
“When you look at the UK Equity Income sector there are a number of very well established funds and managers with good track records, but it’s harder to find these in the Global Equity Income sector.”
Gleeson says that the fact UK fund managers have a smaller pool of companies to choose from actually works to their advantage, allowing them to take advantages of opportunities down the market cap spectrum.
This has been especially effective in recent years, with small and mid-caps driving the stellar performance of the likes of Unicorn UK Income and Standard Life UK Equity Income Unconstrained over the past three years or so.
“If you are a global manager and have thousands of companies to choose from, there’s a high chance that you’re just going to go for the larger quality companies with a good dividend track record.”
“We have plenty of these in the UK, but because there are a smaller pool of companies to choose from managers have a better understanding of the market from top to bottom.”
“The UK teams also have arguably better access to their market. Someone like John McClure doesn’t even have to approach companies – brokers call him up if they are looking to raise capital, which is a massive advantage.”
Daniel Lockyer, who heads up the £23m PFS Hawksmoor Distribution fund, adds that the relative strength of sterling has had a big impact on the performance of global equity income funds.
“UK funds for a UK investor have been much better than global funds for a UK investor, because international companies have been hit by a stronger pound,” he said.
“Over the past six months the FTSE World ex UK index is up just 0.7 per cent in sterling terms, but up 6.2 per cent in dollar terms.”
Lockyer is a big fan of global equity income funds, though accepts that a number in the sector don’t do enough to beat their benchmark.
“We’ve had a weighting to UK income funds recently, but that’s because of our view on that particular market. Ordinarily, we prefer global equity income funds because they have more scope to find opportunities.”
“A lot of global funds have underperformed because they’ve been in internationally focused bond proxies, which haven’t done as well.”
“We hold Artemis Global Income, which specifically looks beyond the large cap dividend payers. The manager isn’t afraid to invest in Scandinavia and emerging markets, and he’s been rewarded for doing that.”
Performance of fund, sectors and index over 3yrs
Source: FE Analytics
“There are some that invest in the same old names, but a sector average doesn’t tell you everything.”
FE data shows that the Artemis Global Income fund has significantly outperformed the IMA Global Equity Income and IMA UK Equity Income sector averages, as well as the FTSE World index, over a three year period, with returns of 42.46 per cent.