Though its popularity among UK investors has increased over recent years, the IA Global Equity Income sector certainly has its flaws – most of which revolve around performance. 
Indeed, not only have many funds in the space struggled to deliver a growing income stream and tend to pay out less in dividends than UK equity income funds, FE data also shows very few have managed to add value over the long, medium and short term.
According to FE Analytics, for example, the IA Global Equity Income sector average has underperformed the MSCI AC World index over one, three, five and 10 years and has failed to beat the commonly used benchmark in each of the past four calendar years.
Performance of sector versus index
Source: FE Analytics
Yes, comparing income-seeking global funds against the MSCI AC World index does have its failings given it isn’t a yield-orientated index (some 60 per cent is weighted towards the US, which yields 2.2 per cent), but investors would be forgiven for expecting better performance from active managers who have the whole world to choose from for opportunities.
Of course, though, there have been funds that have been able to justify their active fees over the long and medium term – and that is where most investors have put their money.
However, it means the concentration of assets within the peer group is very high. If you were to include M&G Global Dividend in the sector (though it sits in the IA Global sector), the five largest funds account for some 70 per cent of the total £23.1bn in the peer group.
Concentration of assets in the IA Global Equity Income sector
Source: FE Analytics *figures include M&G Global Dividend
Even if you remove the £5.8bn M&G fund, the top five still account for 68 per cent of the sector’s total assets under management.
However, some of the giants in the sector have started to struggle in absolute and relative terms. The likes of M&G Global Dividend and the now £1.8bn Veritas Global Equity Income fund (which had been £9.4bn and £3.3bn, respectively, at the start of last year) cut their dividends for the first time ever in 2015 and have been bottom quartile in each of the last two calendar years.
Though the likes of Jacob de Tusch-Lec’s £3bn Artemis Global Income fund has continued to perform well, some have questioned whether the surge of inflows into the fund have had an effect on the way in which the manager runs the portfolio – a topic we will revisit in the coming weeks.
There are a select number of smaller funds which are starting to challenge the established players in the space, however.
One of which is the £108m Guinness Global Equity Income fund, managed by Matthew Page and Ian Mortimer. Unlike the other smaller funds in the sector, however, it has a five-year track record having launched in December 2010.
According to FE Analytics, over that time it has been the fourth best performer in the peer group with returns of 65.27 per cent, beating its benchmark – the MSCI World index – by 7 percentage points in the process.
It is also outperforming over one and three years, though it has struggled more recently to keep up with its benchmark. Nevertheless, it is top decile for its risk-adjusted returns (as measured by its Sharpe ratio), alpha generation and its information ratio.
Performance of fund versus sector and index since launch
Source: FE Analytics
The fund is gaining traction within the UK wealth manager and DFM space and Page says there are a number of ways in which Guinness Global Equity Income is different to many of its peers.
“In terms of the philosophy, in the global income space you have different funds with different strategies,” Page said.
“You’ve got M&G with its dividend growth, high dividend yield guys like Newton though they have brought that down more recently, you’ve got the more total return type strategies and more macro-led funds like Artemis as the manager is driving his stock selection by what is going on in the global economy.”
“Then you’ve got people like us who have a more moderate dividend yield, looking for dividend growth but not stretching ourselves for yield. Our dividend yield has roughly been between 3 and 3.5 per cent over the past five or so years.”
Page and Mortimer created their investment strategy from scratch prior to launching the fund.
They start by screening for companies that have at least 10 years of consecutive cash flow returns on investment of 10 per cent, then whittle down the options by striking companies with either a market cap below $1bn or high debt levels of the list.
That leaves them with an investment universe of roughly 500 companies. After that they use valuation metrics such as price to earnings, before even looking at a stock’s dividend. The final portfolio is then made up of just 35 stocks, all of which are equally-weighted.
This seems like quite an odd approach for an income-producing portfolio, but FE data shows the managers have been successful in their approach so far with Guinness Global Equity Income having increased its dividend in each of the last five calendar years.
Guinness Global Equity Income’s dividend history
Source: FE Analytics *Figures based on a £10,000 investment in January 2011
However, the fund has paid-out less in total dividends than the IA Global Equity Income sector average over the past five years.
Page says this is deliberate, however, as it stems from their belief that focusing on a high dividend yield can be a risky strategy.
“If you look at the opportunity set by applying that 10 per cent CFROI, the list of 500 companies we are left with is well diversified and not biased towards one particular sector. However, we also wanted to see what the opportunity set looks like if just applied a 4 per cent or more yield screen,” Page said.
“It means you get 845 companies that meet that criteria, but about half of them are in the financials sector, 10 per cent energy and commodities and 15 per cent in industrials. When you add all of that up, 75 per cent of your opportunity set is in economically sensitive industries.”
The team at Hawksmoor have been backers of the fund for a number of years now, using it on their private client list and as a top 10 holding in their Hawksmoor Distribution fund. James Clark, who is a fund manager on the team, says the manager’s focus on quality is the major draw for Guinness Global Equity Income.
“The fund was new to me when I joined Hawskmoor last summer, but having researched the fund it was the process and the emphasis on quality that I really liked. It makes a lot of sense and Page and Mortimer haven’t messed around with the criteria, they have just been very consistent,” Clark said.
Guinness Global Equity Income has a clean ongoing charges figure (OCF) of 0.99 per cent.