Equity income remains one of the most popular investment strategies among UK investors, but many hold funds that focus on domestic companies rather than looking further afield for income opportunities.
While the UK remains an attractive market for income investors, having too much exposure to one market can lead to a worrying lack of diversification and prompts the need for owning funds investing across a range of countries and regions.
Luckily, there are Europe, US emerging markets and Japanese funds that focus on equity income and have won the backing of analysts from FE and our strategic partner Square Mile. In this article, we take a look at the best of these.
Europe: BlackRock Continental European Income
Europe can be an attractive hunting ground for income investors as the region is home to many high-quality, well-managed businesses with international exposure while offering some of the highest dividend yields across developed equity markets.
The most highly rated fund by FE and Square Mile analysts in the IA Europe ex UK sector is BlackRock Continental European Income. This £918.2m fund has been headed by Alice Gaskell and Andreas Zoellinger since launch in May 2011.
The fund appears on the FE Select 100 list and holds the top ‘AAA’ rating from Square Mile. These ratings come after the fund posted a total return of 63.99 per cent over five years, putting it in the sector’s first quartile, and produced income pay-outs of £173.46 on an initial £1,000.
Performance of fund vs sector and index since launch
Source: FE Analytics
The four FE Crown-rated fund has the aim of generating a higher yield than the market and to increase its dividend payments, which the FE Research team says has led to “outstanding performance” since launch – although the sheer strength of these early days has led to concern that it cannot continue forever. However, our analysts say there are reasons to believe that Gaskell and Zoellinger can keep delivering attractive returns from strong stock picking and flexible sector allocations.
Other analysts have been impressed by the fund’s track record since launch. Earlier this year, Brewin Dolphin fund analyst Anna Haugaard said income investors aren’t paying enough attention to Europe and tipped BlackRock Continental European Income for regional exposure.
“Many of [European] companies are high quality, globally focused, and generating sustainable and often growing dividends,” she said: “The managers of BlackRock Continental European Income, Alice Gaskell and Andreas Zoellinger, are running a very successful strategy taking advantage of exactly these types of opportunities.”
BlackRock Continental European Income has a 0.93 per cent clean on ongoing charges figure (OCF) with a 4.35 per cent yield.
Another highly rated fund in the sector to consider is Standard Life Investments European Equity Income, which has been awarded a Select 100 place and an ‘AA’ Square Mile rating on the back of FE Alpha Manager Will James’ strong record. While the fund has lagged over recent time frames, James has a focus on sustainable income and tends to hold up well in difficult markets.
Given the efficiency of the US stock market, its close coverage by analysts and the weight of assets in index trackers, it can be a difficult task for active managers to prove their worth across the pond and this is shown in the relative lack of highly rated funds.
Clare Hart’s £3bn JPM US Equity Income fund, however, stands out as it is the only income-focused IA North America fund to appear on the FE Select 100 and hold a Square Mile rating, in this case of ‘AA’.
As the graph below shows, the fund has underperformed the sector and the S&P 500 since launch in December 2008 with a 135.60 per cent return. Over this time, an initial investment of £1,000 has led to £245 in dividend pay-outs.
Performance of fund vs sector and index since launch
Source: FE Analytics
The FE Research team is not put off by the fund’s underperformance, pointing out that its strategy makes it more likely that it will underperform in strongly rising markets – like those that have marked US equities over the fund’s time.
Our analysts said: “This fund’s investment process is an interesting one. Even though its track record is too short to assess its true effectiveness, the stock-picking method it employs is tried and tested and has worked well elsewhere. The team has also gained experience running another US equity fund in the same way.”
“Many companies in this market are dividend payers and so the strategy is appropriate and Hart and Simon’s investment universe is large. The fund’s yield is attractive and consistently reaches its target, but investors should know that it remains lower than that offered in Europe and the UK, although it may be more stable.”
JPM US Equity Income has a clean OCF of 0.90 per cent and yields 4.02 per cent.
As mentioned, it is difficult to find highly rated US funds – only one other appears on the Select 100 and that is Schroder US Mid Cap, which does not have an income focus. But Capital Group US Growth and Income is the only income fund in the sector with four FE Crowns.
Global emerging markets: PFS Somerset Emerging Markets Dividend Growth
Despite a tough few years, emerging markets remain an important asset class and promise investors the possibility of strong long-term returns, albeit in exchange for more volatility.
An equity fund attracting attention in the IA Global Emerging Markets sector is PFS Somerset Emerging Markets Dividend Growth, which has been headed by FE Alpha Manager Edward Lam since inception in March 2010.
The five FE Crown-rated fund is currently in the sector’s top quartile over one, three and five years. Since launch, it’s been the third highest returning fund in the sector with a 32.51 per cent return – its average peer has managed just 3.88 per cent, while the MSCI Emerging Markets index is up 5.92 per cent.
Performance of fund vs sector and index since launch
Source: FE Analytics
It holds both FE Select 100 status and an ‘AA’ rating from Square Mile. However, our analysts point out that the yield is low – currently it’s 2.4 per cent while the index’s is 2.49 per cent – but this is a consequence of the portfolio being set up for the long term and in expectation that dividends will grow over time.
Meera Hearnden, senior investment manager at Parmenion, recently picked PFS Somerset Emerging Markets Dividend Growth as a good option for investors looking to drip feed their money into emerging markets.
“If someone’s looking over the long term, as in 10 years plus, and they’re prepared to take a bit of a risk, it’s worth considering areas such as emerging markets,” she said.
“If a company is paying dividends, it means it’s cash-rich, it means its balance sheets are strong, so it’s got all the right financials in place. Although it’s a high-risk area, it’s a high-quality fund in my opinion. Something like this could really benefit from monthly contributions.”
PFS Somerset Emerging Markets Dividend Growth has a 1.30 per cent clean OCF, but it also has applies a dilution levy.
Other well respected income funds in the sector include JPM Emerging Markets Income, which has an ‘A’ rating from Square Mile, and Charlemagne Magna Emerging Markets Dividend, which has four FE Crowns.
Japan: Jupiter Japan Income
Japan is another major market for investors and has been under increasing scrutiny in wake of the bold economic stimulus package launched by prime minister Shinzo Abe. However, neither of the two IA Japan funds on the Select 100 have an income approach.
Simon Somerville’s Jupiter Japan Income does have a rating from Square Mile though, with the £545.4m portfolio being given ‘A’ status on the back of its record in outperforming the Topix.
Performance of fund vs sector and index since launch
Source: FE Analytics
Square Mile’s analysts said: “This is a solid total return proposition. The manager aims to incrementally outperform the index on a consistent basis and while the fund does not target a yield, it is likely to pay a higher yield than the Topix index over time.”
“Mr Somerville is a seasoned investor who applies a rational strategy, focusing on strong cash generative companies that can grow their businesses while paying relatively attractive dividends at the same time.”
However, the team also points out that yields from Japanese equities, although higher than they once were, are low when compared with other stock markets – meaning the fund is better suited to growth rather than income investors.
Jupiter Japan Income, which has a 0.99 per cent OCF, yields 1.50 per cent.
Asia: Schroder Asian Income
Being home to both developed and emerging economies, Asia is often seen as an investment region of its own and income investors have a range of options to choose from here.
The five FE Crown-rated Schroder Asian Income fund, managed by Richard Sennitt since November 2001, is a favourite of analysts, hold an ‘AA’ Square Mile rating and appearing on the Select 100.
While the fund has underperformed its average peer over Sennitt’s time in charge, the portfolio is run with a clear focus on generating income. An initial investment of £1,000 made 10 years ago has yielded income of £750.
It must be kept in mind that Schroder Asian Income used to have a growth focus but in 2006 became an income strategy; since then it has outperformed in total return terms.
Performance of fund vs sector and index since focus change
Source: FE Analytics
The FE Research team said: “Sennitt has spent his entire investment career at Schroders working on Asian equities, and worked through the change in the fund’s objectives in 2006.”
“The fund is one of the few focusing on the Asia Pacific which offers income to investors and which has managed to grow that income each year, even through the financial crisis. This, along with its diversification from other income funds which tend to focus on the UK or other developed markets, makes it even more attractive.”
Schroder Asian Income has a clean OCF of 0.93 per cent and is yielding 4.18 per cent.
Other highly rated equity income funds investing in the Asia region included Matthews Asia Asia Dividend, Newton Asian Income, L&G Asian Income and Invesco Perpetual Asian Equity Income.
