Fund of funds managers are increasingly shunning global equity income funds within their portfolios, according to the latest FE Trustnet study, which highlights a greater use of regional income offerings among professional investors. 
According to FE Analytics, the most popular developed market non-UK equity income fund among multi-managers is now BlackRock Continental European Income, which features in 23 funds’ list of top 10 holdings.
Other popular funds with managers, according to the study, include JPM US Equity Income, Invesco Perpetual European Equity Income, CF Morant Wright Nippon Yield and Jupiter Japan Income.
However, when we conducted this study in previous years, funds within the IA Global and IA Global Equity Income sectors had always been the most popular destinations for multi-managers looking to diversify away from the often concentrated UK equity income market.
That being said, following an extended run of underperformance from some of the largest global equity income funds, they have now fallen way down the popularity list with the experts. These include the likes of M&G Global Dividend and Veritas Global Equity Income.
Most popular non-UK equity income funds with managers
Source: FE Analytics
As the above table shows, the most popular fund on the list is Alice Gaskell and Andreas Zoellinger’s £1.2bn BlackRock Continental European Income portfolio. It is joined on the list by three other European equity income funds, which is an increase compared with recent years.
Continental Europe is commonly seen as the best dividend paying market outside of the UK and along with improving economic fundamentals and the ECB’s QE programme, it isn’t too surprising funds specialising in the region feature so heavily.
The BlackRock fund, which has more than doubled the returns of its IA Europe ex UK sector and FTSE Developed Europe ex UK benchmark since its launch in May 2011, has some notable supporters as well.
For example, it is one of the largest holdings in Gary Potter and Rob Burdett’s F&C MM Navigator Distribution fund and also sits in the five crown-rated PFS Hawksmoor Distribution fund’s list of top 10 holdings.
According to FE Analytics, the BlackRock fund has been one of the best performing portfolios in the sector over three years and has beaten all of the other four European equity income funds on the list except Schroder European Alpha Income.
It also has the highest yield out of the four funds and paid out the most in dividends over the past three years, with investors having since earned £1,582 in income if they had invested £10,000 in January 2013.
BlackRock Continental European Income is a member of the FE Approved List and carries an ‘AA’ rating from Square Mile, which rates Gaskell and Zoellinger’s ability to protect against downside.
“Market conditions since launch have also generally favoured the types of stocks this fund holds, however the fund has made a highly promising start and it is comfortably ahead of the benchmark since inception on a cumulative basis. It should also be noted that the fund has exhibited lower volatility than the market since its inception,” Square Mile said.
Source: FE Analytics
The second most popular portfolio with multi-managers is Clare Hart’s £3bn JPM US Equity Income fund and, interestingly, it is the only North American offering to feature on the list as it appears in 20 top 10s.
Hart’s backers include seven funds from the Architas MA range, six of Bambos Hambi’s MyFolio range and the SVS Brown Shipley Income fund.
Investors may be surprised the fund is so popular given its relatively low yield (like most US equity income funds) of 2.22 per cent and the fact it has largely struggled to beat its S&P 500 benchmark over the years.
FE data shows that since its launch in December 2008, the fund has underperformed against the index by some 30 percentage points with returns of 133.40 per cent – though it is up against its average peer in the IA North America sector over that time.
On top of that, it has underperformed against the benchmark in three out of the last seven calendar years.
However, for genuine income investors JPM US Equity Income has been an attractive proposition. It has had a lower annualised volatility and maximum drawdown than the index and has upped its dividend in all but one year since its inception.
JPM US Equity Income’s dividend history
Source: FE Analytics *figures based on a £10,000 made in January 2009
Another reason why the fund is so popular could be due to a lack of other North American income funds, though, as the next most widely held in the space is Threadneedle US Equity Income, which features in just four top 10s.
Japan is also prominent on the list and it was, along with Europe, certainly one of the most popular markets with investors heading into 2016 thanks to low valuations and huge amounts of stimulus from the Bank of Japan.
It’s fair to say that Japan hasn’t been the best hunting ground for dividend investors, as the highest yielding fund within the IA Japan is CF Morant Wright Nippon Yield (which is also the most widely used by multi-managers with 13 top 10s) at just 2.18 per cent.
However, many expect this dynamic to change as companies are being forced to be more shareholder friendly and increase their pay-out ratios using their significant cash piles.
“Japan is the developed market with the best prospects for the strongest dividend growth in the world over the next 10 years. Japan has always had the ability to pay higher dividends, it just hasn’t had the willingness,” Neptune’s George Boyd-Bowman said.
“But, when you combine the two it creates an incredibly powerful and potent cocktail for dividend growth. That’s what gets us excited and we think there is a very long way to go with this story as pay-out ratios are extremely low from a global perspective.”
The biggest trend to emerge from this study, however, is that professional investors have largely given up on using broad-base global funds to diversify away from the UK equity income sector.
When we conducted this study in 2014, Veritas Global Equity Income and M&G Global Dividend were two of the three most widely held non-UK equity income funds with 18 and 14 top-10 appearances, respectively.
Despite a period of underperformance in 2014, this study last year showed that both funds remained popular.
Popularity of global funds with managers via number of top 10s
Source: FE Analytics
However, FE data suggests that after two significant years of underperformance relative to the MSCI AC World index for Stuart Rhodes’ M&G Global Dividend fund and three in the case of Andy Headley and Charles Richardson’s Veritas Global Equity Income fund, multi-managers have looked for other options.
Both funds (which having been the behemoths in global equity income space have seen their AUMs shrink by more than 35 per cent over the past 12 months) are now underperforming the index by some 20 percentage points over three years.
Now, only eight funds hold M&G Global Dividend in their top 10 while that figure falls to just four in the case of the Veritas vehicle.
This trend isn’t just isolated to global funds which have underperformed, however, with Jacob de Tusch-Lec’s Artemis Global Income fund – which has beaten the index and been a top quartile performer in each of the last four calendar years – sliding down the popularity table.
Currently, just 10 funds – which include HSBC Income Fund of Funds and Henderson Multi-Manager Distribution – hold Artemis Global Income in their top 10 compared to 15 this time last year, further suggesting multi-managers now prefer to have greater control over their income asset allocation than in years gone by.
