One of the major criticisms of the UK dividend paying market, although a very fruitful place to have been exposed to over the longer term, is the fact that it is very concentrated.
In fact, more than 50 per cent of the UK’s total dividends are paid by the 10 largest income producers within the FTSE All Share including widely-held stocks such as Royal Dutch Shell, GlaxoSmithKline, HSBC and AstraZeneca.
This isn’t necessarily a risk in itself, of course, but history has shown that some of the most stable and reliable income payers can go through a torrid time like the banks during the financial crisis and BP after a gigantic oil spill.
On top of that, risks seem to be mounting for the UK income market as the FTSE 100’s dividend cover has fallen to just 1.5 times over the past three years as earnings growth among some of the largest companies has waned. This has caused many to warn that some of the UK’s biggest household names may have to cut their pay-outs at some stage in the not so distant future.
“I suspect we are going to have some pretty bad news coming out of some of the largest companies in the UK market in the coming months,” Standard Life Investments’ Thomas Moore told FE Trustnet last week.
Whether these highly-popular stocks are actually at risk is still very much debatable, but given those concerns it may be a good time for UK investors to asses other options in the equity income space by looking at other regional funds outside of the domestic market.
Therefore, using data from FE Analytics, we have looked at the biggest dividend paying funds over the past five years and see how they have compared to the IA UK Equity Income sector.
Source: FE Analytics *income paid out on an £10,000 investment made in January 2011
Our study only goes back to January 2011 and we chose that time frame as the large majority of non-UK equity income funds have been launched in the last two to three years so this period includes more portfolios.
Also, beginning the study in January 2011 rather than August 2010, although not exactly five years, was the most uniform way of collecting the data given different funds’ dividend payment dates.
While there are clearly risks involved with buying Asian funds owing to China’s slowing economy, plummeting equity market and the impact both those concerns will have on the wider region, income funds within the IA Asia Pacific ex Japan sector have been the highest dividend payers.
According to our data, the average income fund in the sector has paid out £2,638.21 on £10,000 invested in January 2011, which means (although there are far fewer options available to investors) they have actually outperformed the average IA UK Equity Income fund from that point of view.
It is the same story when you take out the funds in both sectors which use covered call options (a derivative which helps boost income pay-outs) as the average Asia fund has paid out some £100 more than its UK rival.
The stand-out dividend payer in the sector has been Schroder Asian Income Maximiser, which will come as little surprise given it is the only one in the sector to use call options.
According to FE Analytics, investors in Richard Sennitt and Thomas See’s £243m fund who bought £10,000 worth of units in January 2011 would have since earned £3,662.15 in dividends, meaning it has paid out more than every UK equity income fund over that time apart from Premier Optimum Income, Schroder Income Maximiser and Insight Equity Income Booster.
Other IA Asia Pacific ex Japan funds to have paid out more than the average UK income fund over that time include Newton Asian Income and Henderson Asian Dividend.
Schroder Asian Income Maximiser (which currently yields 7.2 per cent) has also never cut its dividend since launch in June 2010, delivering dividend growth between 2010 and 2014 of 125 per cent.
Schroder Asian Income Maximiser’s dividend history
Source: FE Analytics
It has also been a top quartile performer from a total return point of view over that time with returns of 28 per cent, meaning it has beaten its MSCI AC Asia Pacific ex Japan benchmark by 10 percentage points.
The Schroder fund tops the sector in regards to its maximum drawdown, which measures the most an investor would have lost if they had bought and sold at the worst possible times, since launch as well.
Performance of fund versus sector and index since launch
Source: FE Analytics
The FE Research team isn’t currently recommending the fund, but has Sennitt’s Schroder Asian Income fund (which is run using the same process, albeit without the use of covered call options) on its Select 100 and says the strategy is an attractive one for dividend seeking investors.
While the five crown-rated Schroder Asian Income fund has paid out one of the lowest amounts in the sector over the period we looked at during this study, it has a very good long-term track record of dividend growth having only cut its dividend once since it changed to an income mandate in 2006.
The FE Research team says it is a useful option, but it highlights the risks of buying Asian income funds in the current environment.
“This [income growth], along with its diversification from other income funds which tend to focus on the UK or other developed markets, makes it even more attractive,” the team said.
“However, the link between global equity markets when they crash is growing stronger and Asia is still very dependent on western economies. Also, currency movements can negatively affect the dividend paid. As a result, this fund is probably best used as a satellite fund alongside a more mainstream core fund.”
The next best dividend paying sector, behind Asia and the UK, is the IA Europe ex UK peer group.
There are six Europe ex UK equity income funds with a long enough dividend track record to be included in this study and the best performer from an income earned perspective has been FP Argonaut European Enhanced Income, which also uses covered call options.
FE data shows the fund, which is managed by Oliver Russ and hedges currency, has paid out £2,601.42 on £10,000 since January 2011. However, the fund has had to cut its dividend on a number of occasions over that time.
The second highest European dividend payer has been Standard Life Investments European Income, which is headed up by FE Alpha Manager Will James and has paid out £2,313.15.
The £2.2bn fund has also outperformed its peers since launch in June 2009, increased its dividend four out of the last five years and sits on the FE Select 100 thanks to James’ stock-picking abilities.
“James focuses solely on dividends when analysing companies. In particular, he aims to estimate the future dividend flow and compares his own forecasts and expectations with those of the market,” they said.
“As expected this approach has proved successful in falling markets but has also fared reasonably well in rising ones.”
Fourth on the list is the IA Global Emerging Markets sector with an average dividend payment of £1,556.53 on £10,000, though there are only two equity income funds in the peer group which have a long enough track record.
Nevertheless, while the level of income Charlemagne Magna Emerging Markets Dividend and PFS Somerset Emerging Markets Dividend Growth have produced is substantially lower than other areas of the global equity market (£1,886.57 and £1,226.49, respectively), taking an income approach seems to have been a prudent strategy.
As FE Trustnet recently highlighted, emerging market equities have been through a very tough period relative to their developed peers over the past five years but the Charlemagne and Somerset funds have paid investors dividends while they have waited for the market to rebound, both sit in the top quartile and have comfortably beaten the MSCI Emerging Markets index since January 2011.
Performance of funds versus sector and index since Jan 2011
Source: FE Analytics
The worst two regional dividend paying sectors since January 2011 have been the IA Japan and IA North America peer groups.
The average Japan fund has paid out £1,253.585 on £10,000 over that time while the average North America fund has paid just £882.95, though that isn’t too surprising given neither market is renowned for its dividend culture.
