Some 58 per cent of IA Global Equity Income funds were forced to cut their dividend in 2015, according to the latest FE Trustnet study, as only 13 out of a possible 31 in the peer group were able to increase their 2014 income distribution the following year. 
There have been numerous warnings about the outlook for equity income funds as dividend cover has been falling thanks to slowing earnings growth while, at the same time, pay-out ratios have been on the rise.
However, most of those concerns have been directed towards the concentrated UK dividend market as many FTSE 100 stocks have had to cut their pay-outs over the past 12 months or so and numerous industry commentators expect other popular holdings to follow suit.
While last year’s dividend data for the IA UK Equity Income sector is so far incomplete and will be drilled down into over the coming weeks, FE Analytics suggests the majority of global funds have already started to feel the effects of macroeconomic headwinds such as plunging commodity prices.
While most of the global equity income funds that reduced their pay-outs last year have a patchy track record of dividend growth, the list of cutters includes the only two portfolios in the space that – up until last year – had only ever grown their annual distributions: Veritas Global Equity Income and M&G Global Dividend (which actually sits in the IA Global sector).
The former had increased its net distributions from 5.46p per unit in 2007 up to 7.12p in 2014, but reduced that figure to 5.93 last year. The latter, on the other hand, initially paid out 2.89p in 2009 and grew that to 6.31p in 2014 before reducing its pay-out to 6.11p in 2015.
Funds’ dividend history in pence per unit
Source: FE Analytics
Both Stuart Rhodes’ £5.5bn M&G Global Dividend and the Veritas offering, which is co-run by FE Alpha Managers Andy Headley and Charles Richardson, have been through difficult periods over recent years and have seen their AUMs decrease as a result.
According to FE Analytics, both portfolios – which were among two of the most popular funds in the global income space – have been bottom quartile and underperformed against their benchmarks in each of the last two full calendar years.
Other funds that reduced their pay-outs last year from 2014 include Newton Global Income, Threadneedle Global Equity Income, Henderson Global Equity Income and Baillie Gifford Global Income Growth.
Invesco Perpetual Global Equity Income, Artemis Global Income and Standard Life Investments Global Equity Income were among those that increased their dividends last year, however.
While it must be noted that open-ended funds have to pay out all of their earnings annually (unlike investment trusts which can hold back 15 per cent to ‘smooth’ over time) why was 2015 such a poor year for funds that have the whole world to choose from for dividend opportunities?
Dan Roberts, who has never had to cut his Fidelity Global Dividend’s income pay-outs since its launch in January 2012, says he and his peers have been fighting an uphill battle in many respects.
“It hasn’t been a great time for dividend investors, despite the fact there has been a clamour for yield given where interest rates sit,” Roberts said.
“Dividend investing, as a style, hasn’t done well on a global basis over the last three or four years and the dominant reason for that is because the US has been such a significant outperformer (and is a relatively low yield market), so an underrepresentation of dividend strategies in the US has been a headwind and you can see that in the peer group performance.”
Performance of sector versus index over 3yrs
Source: FE Analytics
George Boyd-Bowman, who has never cut his Neptune Global Income fund’s dividend either, agrees that it has been a tough environment.
“We have already seen a whole host of commodity exposed companies slashing their dividends and we believe that the current wave of dividend cuts is not over yet. Our message is don't be tempted by those high yields in commodity sectors because in our view they're classic dividend value traps,” he said.
“More generally, it’s become harder and harder to find dividend growth opportunities of late, because staple high yield companies and established income payers with unbroken dividend growth for many years have become more expensive.”
“We have been rotating out of these so-called dividend aristocrats, towards what we call dividend special situations. These companies haven’t necessarily grown their dividend consistently over the last five, 10 years, but we think there is a reason or a catalyst why they are going to do so over the next 10 years.”
“We have had to look off the beaten track for dividend growth, and we will have to do so again to achieve it in 2016.”
While those factors may well have played a part last year, FE data suggests managers in the space have (as a group) been poor at consistently producing income growth.
According to our data, just six out of a possible 28 (or 21.43 per cent) have managed to increase their distributions in each of the last two calendar years.
These are PIMCO GIS Global Dividend (which also paid out the most in total dividends between 2013 and the end of 2015), Liontrust Global Income, Neptune Global Income, Fidelity Global Dividend, Invesco Perpetual Global Equity Income and Schroder Global Income.
Funds’ dividend history in pence per unit
Source: FE Analytics *Figures based on a £10,000 investment in January 2013
However, given the PIMCO, Neptune and Fidelity funds were launched in 2012 and the Invesco Perpetual and Schroder offerings paid out more in dividends that year than in 2013, Liontrust Global Income is therefore the only one (out of a possible 25 with a long enough track record) to have grown its dividend in each of the last three calendar years.
The fund also paid out the most in total dividends over that time frame, as investors who bought £10,000 worth of units in January 2012 would have earned £2,397.68 in income by the start of this year.
Part of that, though, will have come from the fact that the fund used to reside in the IA UK Equity Income sector and still has the highest weighting to FTSE-listed stocks (35.73 per cent) in the peer group, which has historically been one of the biggest income paying indices relative to other regions.
That is not taking anything away from the efforts of James Inglis-Jones, who became manager in March 2009, and Samantha Gleave’s, who joined him in September 2009.
FE data shows that Inglis-Jones has never cut the fund’s distribution since he became manager (although he did have to hold Liontrust Global Income’s dividend in 2012). The fund’s dividend history is shown below as well as its published yield at the start of each year.
The yield on the fund has generally fallen while the income distributions have increased, again reflecting how it can be a misleading tool (when used on its own) in regards to judging an equity income portfolio.
Liontrust Global Income’s dividend history and historic yield
Source: FE Analytics
Turning back to 2015, now, and FE data shows that the ‘average’ fund in the IA Global Equity Income sector paid out £376.71 on £10,000 last year.
The fund that paid out the most was UBS Global Enhanced Equity Income (£846.67 on £10,000), which uses covered call options to boost its income distributions. The other biggest dividend payers included the Liontrust fund, PIMCO GIS Global Dividend and Premier Global Utilities Income.
Biggest dividend-paying global equity income funds in 2015
Source: FE Analytics *Total income paid in 2015 on a £10,000 investment
However, given that six of the sector’s top 10 income payers last year were third or fourth quartile in the sector from a total return point of view (and four of those posted negative returns), the data suggest a number of managers generated their income at the expense of capital.
