Global dividend funds fatally flawed, says King
The manager says the growing tendency of foreign companies to return cash to shareholders won’t last.
Investors rushing into global income funds to profit from the growing dividend culture among foreign companies will end up getting their fingers burnt, according to Premier manager Simon King (pictured)
King, who runs three UK-focused equity funds, says that dividend payments are only really taken seriously in the UK and foreign companies will have no hesitation in halting the payments when things get difficult.
"Companies tell you what you want to hear but when things get tough you will start to see problems," he claimed.
"The UK is the only market in the world with a true dividend payment culture."
With corporate balance sheets loaded with cash and companies keen to lure money from supposed safe-haven fixed interest investments, it has become more common for companies outside the UK to pay out dividends.
This change in culture has seen the launch of a number of high-profile global income funds in recent years, including Newton Asian Income
, M&G Global Dividend
and Newton Global Higher Income
However, King says this policy is likely to be abandoned as soon as it is convenient, as shareholder payouts are not given the priority that they are in the UK, where cancelling a dividend would be far more serious.
"I’m not saying it will change in the short-term, but it’s when things become more difficult that they could take a turn for the worse," he said.
Data from FE Analytics
shows that M&G Global Dividend has attracted more than £1bn in inflows in the past year on the back of strong performance and, along with Newton Global Higher Income and Newton Asian Income, sits in the 10 most popular funds in terms of inflows over this period.
Performance of fund vs sector and index since launch
Source: FE Analytics
Further Global Equity Income funds have been launched this year to take advantage of the trend, including Fidelity Global Dividend.
The manager, Dan Roberts, told FE Trustnet
last week that dividends were rising in the UK, US, Europe and Japan, creating opportunities for fund managers with a global remit.
King says that the optimism may be misplaced.
"Japan has bought itself to death and I don’t think that will change, but elsewhere I am convinced the dividend will be the first thing to go," he claimed.
The manager of the Premier Strategic Growth
, Premier Alpha Growth
and Premier UK Mid 250
funds says the best opportunities for dividends are in the UK, despite the struggles of policy makers to get on top of the economic turmoil.
"The Government doesn’t have the balls to take the long-term decisions that would be necessary to refocus the economy," he continued.
In King’s view the corporate sector is doing well while consumers struggle, meaning the economy is "firing on one cylinder".
He commented: "They have managed to persuade the Government to take on most of the bad debt. Most are trading at or close to peak margins. I’ve never seen cash flows stronger."
"This is a combination of the fact that we aren’t so bad compared to other countries and success in keeping costs down – including salaries of course."
"However, as soon as things start to improve elsewhere, that’s when I would start to worry for the UK," he added.
King says the Government should focus on building up strategically important industries in the UK and gear policy towards them as is done in countries such as Germany and Japan.
He highlights the fact that the UK automotive sector – which produces more cars than Germany – has been successful in spite of Government action rather than because of it, and has subsequently created a flourishing car-part manufacturing industry.
Catalytic-converter manufacturer Johnson Matthey is King’s biggest overweight position in the Premier UK Strategic Fund.