There have been increasing warnings over the outlook for the UK dividend market, with many market commentators urging investors diversify their income streams away from IA UK Equity Income funds as a result. 
Despite the fact that many IA Global Equity Income funds say they offer diversification away from the UK, a recent FE Trustnet study highlighted that many funds in the peer group have high weightings to FTSE-listed stocks as well.
According to FE Analytics, the average fund in the sector is 10 percentage points overweight the UK relative to the MSCI AC World index.
When we drilled down even further, we found that the large majority of the funds in the sector also have chunky positions in some of the most popularly held dividend-paying stocks in the IA UK Equity Income sector.
% of sector constituents that hold UK blue-chips as top 10 holdings
Source: FE Analytics
Neptune’s George Boyd-Bowman says, in that respect, global managers are doing their clients a disservice as they aren’t factoring in why UK-based investors would turn to their funds in the first place – arguing that many of them are putting investors’ income at risk due to possible stock overlaps with their existing UK funds.
“We know that one of the key reasons why clients own the fund and, indeed, why they own global income funds is to diversify their source of income outside of the UK,” Boyd-Bowman said.
“If we go and stuff our portfolio full of UK stocks, we are not being very helpful. That’s something you might think all global income managers would think about, but they don’t.”
When analysing the data for this article that point was made even clearer as we found that very few funds in the global sector either have a low weighting to the UK or don’t hold some of the biggest UK dividend-paying stocks within their portfolio.
Here, though, we highlight three from the peer group that are actively avoiding both the UK and the most popularly-held stocks in the IA UK Equity Income sector.
We start with Boyd-Bowman himself, who has managed the £3.7m Neptune Global Income fund since its launch in December 2012.
According to FE data, the fund holds 11.08 per cent in the UK but those stocks aren’t those that you would find in a core UK equity income fund, with his largest FTSE-listed companies being the likes of Devro and Intermedia Capital.
No UK equity income funds hold Devro as a top 10 holding, while five hold Intermedia Capita – though those are largely non-core UK funds such as Marlborough Multi Cap Income and QAM Downing Monthly Income.
“The important point on our UK weighting is it’s not going to rise,” Boyd-Bowman said.
The reasons for that, according to the manager, is because he is concerned about the outlook for UK dividend sustainability and because he knows the main reason his existing, and potentially new, investors want his fund is because they want diversification away from their existing UK fund.
Instead of owning the UK, Boyd-Bowman’s biggest bets are towards Europe and Japan. In fact, he described the latter as the best market for dividend growth over the next decade due to reforms within the country.
According to FE Analytics, however, Neptune Global Equity Income has underperformed relative to both the sector and its MSCI World benchmark since its launch – largely as a result of Boyd-Bowman’s decision to be underweight the US market by a considerable margin.
Performance of fund versus sector and index since launch
Source: FE Analytics
On a more positive note, the fund – which yields 4 per cent and aims to deliver income growth – has increased its dividend in each of the last three calendar years.
Next up is one of the best known funds in the sector.
The £2.9bn Artemis Global Income fund, which is headed up by Jacob de Tusch-Lec, currently has 10 per cent in UK equities. Again, those stocks aren’t companies you would typically find in a UK equity income fund – such as City of London IT, WPP, Cobham and Paddy Power.
All of those stocks feature well down de Tusch-Lec’s portfolio as well.
The reason for that low-weighting is because, as the manager has told FE Trustnet in the past, Artemis Global Income was originally created to sit alongside the group’s flagship UK income fund managed by Adrian Frost and Adrian Gosden.
“I’ve been a firm believer that this fund is for UK investors who want something different, because UK equity income is such a powerful beast. This isn’t about me taking a view on AstraZeneca, HSBC or GlaxoSmithKline, but it is more about giving investors something that they don’t already have,” the manager said.
The manager combines stock-selection with a macro overlay when building his portfolio and, as a result, currently holds 40 per cent of his assets in the Europe but is significantly underweight the US on valuation grounds.
According to FE data, Artemis Global Income has been the best performing portfolio in the sector since its launch in July 2010 with returns of 79.91 per cent, meaning it has beaten its MSCI AC World benchmark by close to 30 percentage points in the process.
Performance of fund versus sector and index since launch
Source: FE Analytics
The fund has also beaten its benchmark in every calendar year since launch and has turned in top quartile gains in four out of the last five years – 2012, 2013, 2014 and 2015.
Artemis Global Income yields 4.17 per cent and FE data shows if investors bought £10,000 units at launch, they would have since earned £2,972 in income. The fund has also grown its dividend in all but one year over that time.
The final fund on the list is a relative unknown within the sector.
However, FE data shows that Patrick Ryan’s £268m Lazard Global Equity Income fund has the lowest weighting to the UK in the sector at just 3.6 per cent – making it one of only two funds in the peer group to be underweight the region relative to the MSCI AC World index.
It counts no FTSE-listed stocks in its top 10, though its UK exposure is gained via Pearson, Pennon and Vodafone – with the latter featuring in 43.37 per cent of IA UK Equity Income funds’ lists of top 10 holdings.
In truth, Lazard Global Equity Income has been one of the worst performers in the peer group over the longer term.
According to FE Analytics, it has returned just 12.10 per cent since its launch in October 2007 compared to a 46.77 per cent and 42 per cent gain from the MSCI AC World index and sector average, respectively.
It is also bottom quartile and down against the index over one, three and five years, having underperformed in each of the last three calendar years. This is down to the manager’s strong value approach to investing; the style has underperformed growth and quality over recent years.
The fund currently yields 3.8 per cent and while Ryan hasn’t consistently grown his fund’s distributions, he has delivered decent income growth over eight calendar years with no major cuts.
Lazard Global Equity Income’s dividend history
Source: FE Analytics *figures based on a £10,000 investment made in January 2008
Ryan’s regional weightings are to North America, continental Europe and Asia Pacific, which account for 43.10 per cent, 19.80 per cent and 19.9 per cent, respectively, of Lazard Global Equity Income’s total assets.
