Income investors should be looking to diversify into funds such as Fidelity Global Dividend or regional offerings focusing on markets other than UK, according to AXA Wealth’s Adrian Lowcock, who warns the UK’s dividend market is “not healthy”.
The latest Henderson Global Dividend Index, published by Henderson Global Investors, painted an unpleasant picture for UK equity income investors. While global dividends rose 2.2 per cent in the opening quarter of 2016 (to reach $218.4bn), the UK was one of the markets that lagged.
Over the three-month period, dividends fell 5 per cent on a headline basis; the asset management house warns that more are likely to come later in the year as companies in the commodities and financial sectors are forced to cut their dividends.
Source: Henderson Global Dividend Index
Alex Crooke, head of global equity income at Henderson, said: “UK income investors are heavily dependent on oil, banks and mining companies, which together make up almost half of the country’s equity income.”
“The UK welcomed the world’s biggest mining companies to list in London during the mining boom, benefiting from the dividends they offered. Now, the sharp downturn in the mining sector is hitting shareholder income hard. In the oil sector, with Shell now comfortably the largest dividend payer in the world, investors can be thankful the UK’s oil majors have not yet succumbed to lower oil prices and cut their dividends. It’s times like these that demonstrate the risks to investors of such a heavy reliance on just one or two sectors.”
Crooke adds that global dividend growth is likely to be “a little slower” in 2016 than it was in 2015 but strong growth is expected in Japan, North America and Europe, which will help to offset some of the weakness set to be seen in the UK, Australia and emerging markets.
He also says it is prudent for UK investors to consider diversifying their equity income exposure away from the UK – a point that Adrian Lowcock, head of investing at AXA Wealth, agrees with.
While Lowcock notes that much of the reported fall is down to the weakness of sterling, UK dividends are likely to remain under pressure because of their heavy dependence on the mining and oil sector.
“There have already been plenty of cuts announced but the full impact has not been fully factored in and dividend cover in the UK is not healthy, with several large dividend payers maintaining their dividend by drawing on retained income from previous years’ profits. This is only sustainable in the short term,” he said.
“The report does highlight the importance of diversifying your equity income exposure. Income seekers need a combination of healthy dividends and dividend growth. The US has been a big growth area for dividends whilst the technology sector has been the fastest growing dividend payer for several years. Geographical diversification also help protect investors from the effects of changes in currency can have on dividends.”
In the following article, we look at three funds Lowcock tips for investors seeking to broaden their equity income exposure.
“Manager Daniel Roberts runs an unconstrained fund and does not follow indices or benchmarks. Each stock is selected only for its income potential. However, he also operates a total return focus in that he looks to invest in companies which pay a sustainable and growing dividend and does not chase an income at the expense of capital growth,” Lowcock said.
“His approach could be described as long-term value, he looks for companies which look attractively valued over the whole cycle or longer term, not just based on current valuations. This fund is run with a cautious view and capital preservation is an important component.”
Performance of fund vs sector and index since launch
Source: FE Analytics
As the graph above shows, the fund’s 72.72 per cent total return has outpaced the growth in both its average IA Global Equity Income peer and the MSCI AC World benchmark by a wide margin; in fact, the fund is the second highest returner in the sector over this time frame.
The portfolio’s main exposures are to the healthcare, media and food, beverage & tobacco sectors, while it avoids the under-pressure energy and materials sectors, as well as emerging markets.
The fund appears on the FE Invest Approved List, as the FE Research team rates Roberts’ willingness to take strong sector bets and generally cautious approach to equity income investing.
Fidelity Global Dividend has a clean ongoing charges figure (OCF) of 0.97 per cent and is yielding 3.04 per cent; an investment of £1,000 at launch would have received £160 in income payments.
Schroder European Alpha Income
Lowcock said: “The outlook for European dividends continues to improve as we move through the year. Manager James Sym runs this fund on a business cycle approach taking into account macroeconomic climate and market sentiment when picking individual stocks.”
“There is a tendency towards value stocks but this will vary with where Sym believes we are in the economic cycle. The cyclical stock picking strategy should benefit investors most in rising market and is designed to take the most advantage of the European recovery.”
Performance of fund vs sector and index since launch
Source: FE Analytics
This fund is also ranked second in its sector since launch, as its 80.70 per cent total return is some 30 percentage points clear of its average IA European ex UK peer and its FTSE World Europe ex UK benchmark.
Square Mile Investment Consulting & Research, which has the fund on its ‘positive prospects’ list, said: “Whilst it is still early days as the manager is relatively new at running money, we are impressed with his stockpicking intuition and think the fund shows the potential to be a solid longterm offering. However, we would like some time to build a longerterm conviction in it.”
Schroder European Alpha Income has a clean ongoing charges figure (OCF) of 0.92 per cent and is yielding 3.43 per cent; an investment of £1,000 at launch would have received £191 in income payments.
The US is frequently overlooked by investors, as the country tends to pay out lower dividends than those on offer in the UK and Europe. However, Lowcock thinks that some attractive options – such as JP Morgan US Equity Income – can be found.
He said: “This fund has an unconstrained large-cap focus. Manager Clare Hart takes a value approach to investing. She has a clear investment discipline looking for companies with at least 2 per cent dividend yield but is more concerned with the ability to grow the income.”
Performance of fund vs sector and index since launch
Source: FE Analytics
The fund has outperformed the average IA North America fund since launch but is lagging the S&P 500. Indeed, only 13 of the sector’s 79 members have managed to beat the index over this time frame.
It’s another member of the FE Invest Approved list. The FE Research team said: “The fund’s investment process includes a strict yield discipline that forces it to maintain a healthy distribution to investors.”
“It is part of its three-pillar ethos, which also emphasises the quality of the businesses – that is, the strength and recurrence of their cash flows – and their price on the stock market relative to the companies’ intrinsic value.”
FE’s analysts also note the fund consistently reaches its yield target but points out that this tends to be lower than those from the UK and Europe – although it may be more stable.
JPM US Equity Income has a clean ongoing charges figure (OCF) of 0.93 per cent and is yielding 2.19 per cent; an investment of £1,000 at launch would have received £261 in income payments.
