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The best global funds for income investors

12 September 2014

FE Research has developed a bespoke method of highlighting the best funds on a pure income basis. In the second article of a new series, here are those that fare best across the IMA global sectors.

By Joshua Ausden,

Editor, FE Trustnet

Funds sitting in the IMA Global sector that aren’t constrained by a yield target are among the best-performing in recent years from purely an income perspective, according to FE Research.

Rob Gleeson and his team have developed a new way of ranking income-focused funds for investors who rely on a regular income stream, believing that the industry places too much of an emphasis on yield.

In the three years to the beginning of January 2014, Kennox Strategic Value, First State Global Listed Infrastructure and M&G Global Dividend all made the top-10.

While yield is considered, FE Research looks at the stability of a fund’s dividends and its ability to protect capital on the downside.

Funds are given a score of 100 for each of these measures, then a total score out of 300.

For a more detailed version of how the system works, click here.

The three funds listed above do not have to hit the 110 per cent yield of the MSCI World index, as outlined in the IMA Global Equity Income classification, but have proven very good for income investors nonetheless.

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Source: FE Analytics

The results suggest that investors looking for a regular income stream should look beyond the specified income sectors.

“The most important thing for an investor who relies on income is the stability of the dividend – not yield,” said Gleeson, who believes that yield targets often do more harm than good.

“The dividend yield has nothing to do with the dividend they receive. Some investors sell out of funds that dip below a yield, but it may be that a yield decreases because capital growth has been particularly strong. Similarly, a fund may be yielding 6 per cent because it’s just tumbled in share price terms.”


“What income investors really care about is the money that is being paid every month or quarter, and this doesn’t have a direct relationship to yield. A fund’s yield could go down and the dividend payout could actually increase.”

The relationship between yield and income has been a big talking point of late, with high profile funds such as Invesco Perpetual High Income and Henderson UK Equity Income & Growth forced to leave IMA UK Equity Income in recent months for breaching the rules.

Both prioritise income and more specifically dividend growth, but their below average yield has cost them a place in the sector.

Managers Mark Barnett and James Henderson both said they weren’t prepared to sacrifice total return and dividend growth for the sake of hitting an arbitrary yield target.

ALT_TAG Stuart Rhodes (pictured), who manages the £9bn M&G Global Dividend fund, has chosen to sit in IMA Global rather than IMA Global Equity Income for the exact reasons above.

In a previous FE Trustnet article, he stated: “We’re not buying the best yields today – all I care about is finding companies that can grow their yield. It’s a mathematical certainty that growing your dividend will eventually be reflected in high returns, otherwise yields hit unrealistic levels.”

As well as helping to deliver a strong total return, dividend growth and stability is crucial for investors who rely on a regular income stream, such as those in retirement.

Though M&G Global Dividend didn’t score as highly as others in the yield stakes [90/100], it scored a very healthy 94 for dividend stability over the period. The fund is currently yielding just over 3 per cent.

Rhodes has suffered some significant falls during his reign, reflected by the fund’s mediocre score for capital protection [73/100].

M&G Global Dividend has been more volatile than its IMA Global sector average over a three and five year period, though does have a slightly lower max drawdown.

Peter Meany’s First State Global Listed Infrastructure fund, which comes in ninth, has a very similar record to M&G Global Dividend, scoring over 90 for yield and dividend stability but 78 for capital protection. The fund’s focus on infrastructure helps it generate an inflation-linked income.

For cautious investors who are keen for better protection of their capital, Charles Heenan's Kennox Strategic Value fund may be of interest.

The £347m fund is a highly concentrated portfolio of just 20-30 holdings, which are selected according to a strict value process. The contrarian, deep value style protects on the downside as the stocks to which it leads the team have already fallen a great deal.

Kennox scores an impressive 99/100 for both dividend stability and capital protection.

The graph below shows just how effective Heenan has been in protecting capital on the downside since taking over the fund in 2007.


Capital growth performance of fund and sector over 7yrs

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Source: FE Analytics

Heenan isn’t afraid to build up his cash position if he doesn’t think there is adequate value in the market, which helped him in both the 2008 and 2011 sell-offs. He is currently holding 18 per cent in the money markets.

What’s less positive for income investors is the fund’s yield; it is currently yielding just under 2 per cent, and only scored 85/100 in this area over three years.

While Gleeson does think that yield is over-emphasised, he says that it still needs to be considered.

“If you invested in a fund many years ago, then you could still be getting a decent dividend even if a fund is yielding very little. If you’re buying it today however, the yield is obviously much more important,” he said.

Moreover, while Heenan has invested in dividend-paying companies in recent years, Kennox Strategic Value is not officially an income fund, meaning that it could switch its focus in the future.

Looking at the broader IMA Global Equity Income sector, Legg Mason Global Equity Income has been the most consistent across the three measures, scoring more than 85 for yield, capital protection and dividend stability.

Paul Ehrlichman’s fund, which is currently yielding 3.3 per cent, is also a top-quartile performer from a total return point of view over one, three and five year periods.

Performance of fund and sector over 5yrs

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Source: FE Analytics

Liontrust Global Income has been a standout performer for yield and dividend stability, though like M&G Global Dividend falls down slightly for capital protection.

Other funds such as Henderson Global Equity Income, Martin Currie Global Equity Income and Aberdeen World Equity Income have high yields, but score less than 60 for dividend stability.


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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.