M&G Global Dividend and Veritas Global Equity Income have been the only two global equity funds to have consistently grown their dividends since launch, according to the latest FE Trustnet study.
Regular readers will by now know that we are keen to make income more transparent for investors, given the recent changes to the pension system, the fact that interest rates are at historically low levels and that investors are always told they need to find a growing source of income within their portfolios.
In our campaign, we have called on fund groups to be less secretive in the way which they display their dividend histories in order to give investors a better understanding of the actual amounts that have been paid out in income, rather than purely focusing on yield – which can often be misleading.
However, in most of our income-related articles we have focused purely on the IA UK Equity Income sector given that a huge amount of savers’ capital is tied up in the peer group.
Therefore, in this article we have broadened our horizons and taken a closer look at the Investment Association’s global sectors, which have become increasingly popular with investors looking to diversify their income stream away from the often concentrated dividend-paying UK market.
There isn’t the variety of funds in the global sectors that the UK peer group has – mainly because global equity income as a concept is relatively new – and the large majority haven’t been as effective at delivering income as their domestic rivals.
It is also true that it is harder for open-ended funds to achieve consistent dividend growth than their closed-ended rivals as they can’t withhold a proportion of their annual earnings in good years to ‘smooth’ their income pay-outs in bad ones – like in the case of investment trusts.
Nevertheless, there are two open-ended global funds which have built up strong dividend track records.
One of which is the £3.2bn Veritas Global Equity Income fund, which is headed-up by the FE Alpha Manager duo of Charles Richardson and Andy Headley.
As it was launched in November 2005, it is one of the oldest in the sector and FE data shows that it has increased its dividend in every year since it adopted an income approach in 2007.
Source: FE Analytics, payments based on £10,000 investment on 01/01/2007
According to FE Analytics, if investors had bought £10,000 worth of units in the fund in January 2007 they would have since been paid £4,883.55 in dividends. As the chart above shows, they would have seen the annual distributions increase steadily from £513.07 the first year to £669.19 in 2014.
That means that Richardson and Headley have delivered dividend growth of 30.4 per cent during their tenure.
While FE Trustnet has shown that most global portfolios struggle to add value against their benchmarks, the Veritas fund had also been one of the best performers from a total return point as well.
According to FE Analytics, it outperformed its MSCI World index in six out of its first seven calendar years.
However, as the graph below shows, while the fund is well ahead of the sector average since launch, it is now narrowly underperforming against the index thanks to its bottom-decile returns in 2013 and 2014.
Performance of fund versus sector and index since Nov 2005
Source: FE Analytics
Henderson’s James de Bunsen explained this underperformance in a recent FE Trustnet article.
“It’s basically because they haven’t had anything in US equities, which have done incredibly well,” de Bunsen said.
“The team try to generate a premium yield but they are not prepared to over-pay. Both of those reasons mean the US has been a barren area for them because yields have been so compressed and valuations have been so stretched.”
However De Bunsen says that, given it is massively underweight the expensive US market, now is a good time to look at the Veritas fund.
Veritas Global Equity Income, which yields 4.4 per cent and holds just 26 stocks, has also been very good at protecting capital, which is a key metric for genuine income investors. Its maximum drawdown, which measures the most an investor would have lost if they had bought and sold at the worst possible times, has been 10 percentage points less than that of its benchmark since its launch.
The only other global fund to have achieved a consistently growing level of income is Stuart Rhodes’ M&G Global Dividend, which was launched in July 2008 and is a firm favourite in the space as it weighs in at £8.3bn.
The fund actually sits in the IA Global, rather than IA Global Equity Income, sector as Rhodes focuses on a growing source of income rather than headline yield and this is highlighted by the fact that its current yield of 3.09 per cent is much lower than average fund in the global income peer group.
FE data shows that this approach has been successful, though.
According to FE Analytics, investors who bought £10,000 worth of units in the fund would have earned a total of £3,124.63 in dividends. As the table below shows, those income pay-outs would have grown from £333.12 in 2009 to £614.49 in 2014 – meaning that M&G Global Dividend’s income growth has been 84 per cent over the last six years.
Source: FE Analytics, payments based on £10,000 investment on 01/01/2009
Unlike the Veritas fund though, it has had one of the worst maximum drawdowns in its sector.
Rhodes has built up a strong investor following thanks to his early years on the fund. FE data shows the fund beat both the sector and its benchmark – the MSCI AC World index – in each of the full five calendar years between 2009 and 2013.
However, the fund has fallen on hard times of late as it fell into the bottom quartile in 2014 and is languishing at the foot of the sector table so far in 2015.
Many experts have attributed the fund’s recent lacklustre returns to its growing AUM, which has soared by almost three times over the past three years. However, the group have defended its size on a number of occasions and argued that, given it is a global mega-cap portfolio, the fund has no capacity issues.
Amandine Thierree, fund analyst at FE Research, has her reservations about the size of M&G Global Dividend but says there have been a number of factors which have contributed to its underperformance.
“Firstly, oil. They realised afterwards that some stocks in the portfolio were more sensitive to the oil price than they expected and this hurt the fund in the second part of the year,” Thierree said
“Then there was their US allocation, as they were slightly underweight throughout the year and were taking profits in their US holdings but US equities kept the momentum and gained around 20 per cent by the end of the year.”
Thierree also says that there were certain stock disappointments like Macau Gaming and portfolio calls such as selling ‘quality’ stocks too early.
She added: “So far this year they have had to face a lot of redemptions which I believe is the consequence of last year’s underperformance. Performance-wise, I believe no allocation to Japan is weighing on relative performance and the Macau gaming stocks are still detracting.”
It must be noted that M&G Global Dividend is still comfortably top quartile since its launch and is outperforming its benchmark by close to 20 percentage points.
Performance of fund versus sector and index since July 2008
Source: FE Analytics
Outside of those two names, Threadneedle Global Equity Income has been the best performing global fund for dividend payments over the last five calendar years as investors who bought £10,000 worth of units in January 20110 would have earned £3,188 by January 2015.
However, the fund did cut is dividend in 2012 and 2014.
Liontrust Global Income, which has paid the second highest amount in dividends over that time (£3,159 on a £10,000 initial investment), has also not had to cuts its pay-out over the last five calendar years.
On that £10,000 invested, invested would have earned £595 in 2010, £628 in 2011 and 2012, £648 in 2013 and £659 in 2014.
Liontrust Global Income has had to lower its income pay-out at points since its launch more than 20 years ago though and it must be noted that the £226m fund only recently moved across from the IA UK Equity Income sector.
