Emerging markets a "no brainer" for income investors
The sector’s earnings growth is currently double that of developed markets, but few funds are specifically designed to benefit from this theme.
Higher earnings growth and dividend yield should see emerging market equity income funds edge past their developed market counterparts in the popularity stakes, according to fund manager Manu Vandenbulck.
While UK investors have already tapped into the emerging market growth story, Vandenbulck, who heads up the ING Invest Europe High Dividend fund, believes the vast majority are missing out on an equally compelling theme.
"It is no secret that emerging market countries enjoy stronger economic fundamentals but what is often missed is the dividend potential of emerging market equities," he explained.
"In terms of earnings growth, they show almost double that of developed markets and have outperformed the latter significantly over the last decade. However, this is not reflected in the valuations, with emerging market equities still proving cheaper than those in the developed world."
"Greater sales growth, stronger balance sheets and cheaper valuations underpin the potential for continued outperformance. Furthermore, higher dividend growth rates in emerging markets in the last decade are evidence of improving alignment to shareholders. Low levels of net debt and strong margins support our confidence in dividend sustainability and growth."
According to ING research, the average yield of dividend-paying emerging markets companies stands at 2.98 per cent – a figure that is already higher than Japan at 2.62 per cent and the US at 2.11 per cent.
Vandenbulck points to Asia as a particularly interesting area for income investors.
"In Asia, the highest dividend-yielding stocks have outperformed both the broader index and the highest growth companies since 2001 and over the past 15 years," he explained.
Despite Vandenbulck’s optimism, there is a severe shortage of emerging market income-focused funds on the market. In the unit trust and OEIC universe, there is only the Polar Capital Emerging Market Income, Somerset Emerging Market Dividend Growth
and UBS Emerging Market Equity Income
portfolios – none of which have a three-year track record.
However, there are a few more options available that focus solely on Asia. The standout performer is Jason Pidcock’s £1.7bn Newton Asian Income
fund, which was one of the best-selling IMA funds last year. According to FE data, it has more than doubled in size in the last 12 months alone.
Performance of fund since launch vs sector and benchmark
Source: FE Analytics
Pidcock has delivered 133.38 per cent since November 2005, outperforming his sector average and FTSE Asia Pacific ex Japan benchmark by 36.49 and 25.92 per cent respectively. Newton Asian Income is the least volatile portfolio of its kind over this period and, with a one-year historic yield of 4.85 per cent, it is one of the highest yielding.
Schroder Asian Income
, Henderson Asian Dividend Income
and the recently launched Liontrust Asia Income funds are also viable options for investors.
Richard Titherington’s £189m JPM Global Emerging Market Income Trust
is the only closed-ended fund of its kind. According to FE data, it has returned 17.42 per cent since it was launched in July 2010 and is currently yielding 2.81 per cent.