This trend doesn’t show any sign of abating although, as many managers have recently noted, greater yields are harder to come by.
The spectre of an interest rate rise in developed markets also bodes less than well for income investors in both equities and fixed income.
The search has led investors into, arguably, higher risk areas such as high yield and property funds but might investors be overlooking emerging market equity funds to give a boost to their income holdings?
Investors in emerging markets have traditionally been focused on growth due the perception that rapidly increasing gross domestic product and broader economic change would boost stock market returns.
According to FE Analytics, the MSCI Emerging Markets index has gained 261.79 per cent over the past 15 years while the FTSE All Share has gained 95.02 per cent, demonstrating the high growth of the asset class in purely capital terms over this period.
Performance of index over 15yrs
Source: FE Analytics
However, a number of income- focused funds in the IMA Global Emerging Markets sector have passed their three-year anniversary in 2014, meeting a growing demand for income from investors in emerging markets.
There are currently seven funds in the sector that focus on income, all launched over the past four years.
The average current yield amongst the funds is 3.7 per cent compared to a current average in the IMA UK Equity Income sector of 3.99 per cent – but the gap is narrowing.
The funds include Charlemagne Magna Emerging Markets Dividend, JPM Emerging Markets Income, Newton Emerging Income, Polar Capital Emerging Markets Income, Somerset Emerging Markets Dividend Growth, Standard Life Investments Global Emerging Markets Equity Income and UBS Emerging Markets Equity Income.
An investor who put £10,000 into these funds would have received up to £744.98 over the past two years with five out of the seven also proving capital growth.
Projit Chatterjee, manager of the £108m UBS Emerging Markets Income fund, says he expects generation of income to rapidly increase from emerging markets.
“There is a long-term trend which is very positive for the case for income in emerging markets. If you look at the MSCI Emerging Markets index and you look at how many companies pay dividends in 2000, less than half paid dividends,” he said.
“Today 90 per cent of the companies pay dividends. Developed markets have always been high - around 80 per cent - but emerging markets have now overtaken that in terms of the percentage of companies paying dividends.”
He says this is being largely driven by demographic change in the region.
“If you look at the life expectancy over the past 30 years in developed markets, it has gone from about 73 to 78 years. In emerging markets – emerging Asia being the largest region – it has gone from 58 to 70 years.”
“As you are expecting to live for several years after you retire, it leads to a need for income going up in these countries. The population needs more income than they are used to and consequently the financial services industry will probably address that by offering products that deliver income to people.”
“As this happens you need the income to come from the stocks you own, so the need for this income is being communicated from investors to fund managers and they are putting pressure on companies to pay out income.”
The manager says it is not without risk and that the fund’s recent underperformance due to its larges overweight in Russian equities highlights the vulnerabilities of markets to sentiment swings.
According to FE Analytics, the fund has returned 5.7 per cent since launch compared to average loss of more than 2 per cent from the sector.
Performance of fund, sector and index since Jan 2011
Source: FE Analytics
Richard Titherington, chief investment officer for emerging markets at JP Morgan, says income stocks are currently looking very cheap in emerging markets.
“People tend to forget about dividends in the emerging world. They think about emerging markets as a growth story, they don't think about in terms of compounds growth from dividends.”
“My expectation is that the next 20 years will look very much like the last 20 years. You will have higher rates of long-term growth with much greater cyclicality both in terms of earnings and currencies and therefore market returns.”
“A company's dividend policy is not a bad proxy for corporate governance. The irony now is that corporate Russia is actually paying out more dividends than they have done before precisely at a time when everyone hates the Russian government.”
