Investors are often told that they should diversify their income stream away from the often concentrated UK dividend market and FE’s AFI panel of leading industry names rates a number of non-UK income funds to such an extent that they hold them in all three of their portfolios; the Aggressive, Balanced and Cautious indices.
In this article, and in the next in the series, we highlight four of the funds that they think suit every investor.
Newton Global Higher Income
The first on the list is James Harries’ Newton Global Higher Income fund which, at £4.1bn, is one of powerhouses in the IMA Global Equity Income sector.
The fund was launched in November 2005, meaning it is one of the oldest in the sector.
According to FE Analytics, it has been the second best performing fund over that time with returns of 115.22 per cent, beating its FTSE World benchmark by 25 percentage points.
Performance of fund vs sector and index since Nov 2005
Source: FE Analytics
Though the fund’s longer-term track record is strong, it has lagged in the recent rally; turning in third quartile returns over one and three years.
Amandine Thierree, analyst at FE Research, rates the fund highly and though she says it could fit into most investors’ portfolios, it should be used as protection against falling markets.
“The fund repositioned during the 2008 financial crisis and moved out of financial companies and other cycle-sensitive areas,” Thierree said.
“Since then it has favoured healthcare and telecom, for their cash flow stability, and has refrained from exposing too much the portfolio to a single country. The new structure was designed to beat the fund’s peers in falling markets, which it did in 2011, but means it struggles a little in rising markets as in 2013.”
Newton Global Higher Income is made up of 66 stocks and it is a large-cap portfolio due to the manager’s more cautious outlook.
Top 10 holdings include blue-chips such as Microsoft, GlaxoSmithKline and Roche.
It yields 3.75 per cent and has an ongoing charges figure (OCF) of 0.8 per cent.
Fidelity Global Dividend
Though it has a much shorter track record, the £95m Fidelity Global Dividend is a firm favourite with the AFI panel.
Daniel Roberts launched the fund in January 2012 and our data shows it has been the sixth best performing portfolio in the IMA Global Equity Income sector with returns of 42.3 per cent.
Its benchmark – the MSCI AC World index – has returned 38.68 per cent over that time.
Performance of fund vs sector and index since Jan 2012
Source: FE Analytics
It has underperformed against both the sector and index over one year, however. Roberts’ largest regional weightings are Europe and the US which combined make up 71.2 per cent of his fund.
The manager only holds 11 per cent in the UK, meaning that it could sit alongside a number of UK equity income funds without too much overlap.
However, his UK exposure does include popular holdings such as National Grid, SSE, AstraZeneca, HSBC and Vodafone.
The manager also holds 6.8 per cent in cash at the moment.
Fidelity Global Dividend has a yield of 2.94 per cent and its OCF is 1.19 per cent.
Veritas Global Equity Income
The final fund from the IMA Global Equity Income sector is the £2.7bn Veritas Global Equity Income fund, which is headed-up by the FE Alpha Manager duo of Andy Headley and Charles Richardson.
Our data shows it has been the best performing fund in the sector since its launch in February 2005 with returns of 139.53 per cent, beating its MSCI World benchmark by close to 30 percentage points.
Performance of fund vs sector and index since Feb 2005
Source: FE Analytics
The fund has also beaten its benchmark in five of the last seven years; the exceptions being 2010 and 2013.
The team at Square Mile are fans of the fund and says there is one major reason why it underperformed in those years.
“The fund will almost inevitably lag towards the end of a bull market when valuation metrics become too rich but one of the keys to the success of the strategy is the managers' ability to deploy cash reserves once valuations correct and become more attractive.”
“Investors will require patience but the team have put together an enviable long-term track record that is significantly ahead of the World index.”
The fund holds Square Mile’s AA-rating.
Richardson and Headley have a good track record of defending capital. The fund made a small positive return in the falling market of 2011 and only lost 9 per cent in the crash year of 2008 when the sector and index lost close to 20 per cent.
The managers currently favour Europe and Asia Pacific equities for their regional exposure and hold 8.3 per cent in cash.
It is a concentrated portfolio of 26 holdings and its yield is 4.3 per cent. The OCF is 0.79 per cent.
M&G Global Dividend
FE Alpha Manager Stuart Rhodes’ M&G Global Dividend is a firm favourite with the AFI panel and other experts such as the Jupiter Merlin team, who hold it across a variety of their funds of funds.
At £9bn, it is also the largest global fund in the IMA universe.
However, unlike the other three funds mentioned so far, Rhodes’ fund doesn’t sit in the IMA Global Equity Income sector.
Thierree says Rhodes decided to have his fund in the IMA Global sector as yield is not his primary concern when picking stocks, but a company’s ability to deliver a growing dividend is.
“Rhodes only invests in 50 stocks and if one gets in, another is kicked out. He prefers to buy companies with a low yield, as this suggests they are under less pressure and have room to increase their income payout.”
“However, high yields can also mean that a company is sacrificing its own growth to pay shareholders; this is not what he wants as he is a long-term investor and prioritises capital appreciation.”
This approach has worked so far. Our data shows it has returned 102.9 per cent since its launch in July 2008 while its MSCI AC World benchmark and the IMA Global sector have returned 72.59 per cent and 57.59 per cent respectively.
The fund has been top quartile over five years, second quartile over three years but has slipped into the third quartile over 12 months due to its underperformance so far in 2014.
Rhodes’ highest regional exposure is to the US and Canada, with the two markets accounting for more than half of his total portfolio.
He counts North American companies such as Gibson Energy, Methanex, Johnson & Johnson, Microsoft, Occidental Petroleum and Amgen within his top 10. The fund has a yield of 3.07 per cent and its OCF is 0.91 per cent.
