The demand for equity income funds, especially in here in the UK, has surged in recent years as interest rates available on bonds and cash has been low over recent years.
Due to dividend concentration within the IMA UK Equity Income sector – more than 75 per cent of funds in the sector hold GlaxoSmithKline as a top 10 holding, for example – investors have been looking to portfolios with a more global remit in order to diversify their income streams.
However, some of the funds in the IMA Global Equity Income sector have a high weighting to the UK, meaning if an investor were to hold them alongside their core UK income fund, there could well be a high degree of stock overlap.
For instance, Liontrust Global Income has close to 60 per cent invested in the UK while Baillie Gifford Global Income and Guinness Global Equity Income have more than 20 per cent in FTSE All Share stocks.
There are, however, a number of global income managers that do genuinely look outside of domestic index for their yield. One example is the £337m Lazard Global Equity Income fund.
Our data shows that the portfolio, which is headed up by Patrick Ryan, has the lowest UK exposure in the sector at just 4.2 per cent and that weighting has remained minimal since the fund’s launch in October 2007.
It doesn’t count any FTSE-listed companies as top 10 holdings and its only UK stocks are Royal Dutch Shell, Direct Line Insurance Group and Resolution, but the average weightings in those stocks is just 1.4 per cent.
While those companies only make up a small percentage of Ryan’s portfolio, Royal Dutch Shell does feature in more than half the IMA UK Equity Income funds’ list of top 10 holdings while Resolution features in seven top 10s and three top 10s.
The Lazard fund, which currently yields 3.7 per cent, has 30 per cent in the US, 29 per cent in continental Europe and more than 20 per cent in global emerging markets.
However, while the fund has very little in the UK, it has tended to underperform against both its peers and its benchmark – the MSCI AC World – since its launch in the Autumn of 2007.
According to FE Analytics, over that time it has returned 33.9 per cent while the sector and benchmark have returned 43.24 per cent and 40.59 per cent, respectively.
Performance of fund vs sector and index since Oct 2007
Source: FE Analytics
Jupiter Global Equity Income, which is co-managed by Gregory Herbert and Sebastian Radcliffe, has 9.65 per cent in the UK market.
Like the Lazard fund, Herbert and Radcliffe don’t hold any FTSE-listed stocks in their top 10. They do however, hold UK quoted companies such as Pearson, WH Smith, British American Tobacco, HSBC and Lloyds further down the portfolio.
British American Tobacco and HSBC, in particular, are notoriously popular with UK equity income managers due to their reliable dividends and as they offer exposure to the emerging markets.
Because of that, the chances are that if investors were to hold the Jupiter Global Equity Income fund alongside a core UK equity income fund, they could have quite a lot of exposure to those stocks.
The rest of the fund is invested in the US, which is Radcliffe’s area of expertise as he also runs the Jupiter North American Income fund, and continental Europe which is Herbert’s favoured part of the market, as he manages the Jupiter’s European Income fund.
It too, however, has underperformed against the sector and its benchmark since launch, though that was only a year ago.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
The five crown rated Artemis Global Income fund has 10 per cent of its assets in the UK market and like the Lazard and Jupiter portfolios; it doesn’t hold any UK companies in its top 10.
The £794m fund is managed by Jacob de Tusch-Lec and was launched in July 2010.
According to FE Analytics, over that time it has been the best performing fund in the IMA Global Equity Income sector with returns of 76.29 per cent, beating its MSCI AC World benchmark by more than 30 percentage points in the process.
Performance of fund vs sector and index since July 2010
Source: FE Analytics
The portfolio has a yield of 3.8 per cent and is primarily invested in Europe and the US.
Rob Morgan (pictured), pension and investment analyst at Charles Stanley Direct, says that while investors should hold UK equity income funds, they should also be looking for portfolios, like the Artemis fund, to diversify their income stream. “Whether you like it or not, there are huge sector biases within the UK market.”
“The problem is that there are only a very few amount of stocks, and sectors, which pay-out the most amount of income; sectors like pharmas, energy and stocks like HSBC.”
“It means that a lot of UK equity income managers have to focus on just few stocks to meet the sector’s yield target and are therefore drawn towards these dividend heavyweights.”
“Investors should also be looking for a better spread of yield opportunities from European and global income funds.”