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The UK has lost its monopoly on income, says Murray International’s Bruce Stout

21 February 2023

Allocations to the domestic market have shrunk by more than half over the past five years.

By Tom Aylott,

Reporter, Trustnet

The UK is no longer the dominant market for income investors, according to Bruce Stout, manager of the Murray International trust, who said that growing opportunities abroad are tempting investors elsewhere.

Around 20 years ago the UK made up almost half (46%) of the £1.7bn portfolio’s holdings but that has shrunk to 5.6% today, despite the domestic market characterised by its abundance of high yielding companies.

This decline has continued through to the near-term, with allocations to the region halving from 13.3% over the past five years.

Stout said: “The UK had a monopoly on income and that is still the perception, but that’s not actually the case now that you can diversify your portfolio and pick up a really good yield and dividend growth from all sorts of businesses around the world.”

Appealing income opportunities still exist in the UK, but co-manager Samantha Fitzpartick said that they are finding “better opportunities elsewhere at this point in time and that’s very reflective of other parts of the world really upping their game from an income perspective”.

However, it is not just that there are better opportunities elsewhere, but that many of the UK’s highest paying companies have hit their ceiling with yields, Fitzpartick said.

“In the past, you really had to be in the UK in a meaningful way to offer an income to shareholders but that is absolutely not the case anymore,” she said.

“I think there are sometimes cases where UK companies back themselves into a corner because they're known for being big yielders and they’re frightened of cutting it even if that is not in the best interest of the business long-term.”

Indeed, maintaining yields at such elevated levels could be detrimental to these companies’ financial health over the long term.

For example, Stout pointed out that GlaxoSmithKline was “a slave to a high dividend yield that it couldn't afford” until it was forced to cut pay-outs when business slowed during the pandemic.

Although income investors may have been disappointed by this news at the time, it was a step in the right direction, according to Stout, and other high-yielding companies would also benefit from reducing their pay-outs.

He added: “A lot of companies in the UK used Covid as an excuse to reset the dividend lower, which was probably in the best interest of shareholders longer term because too many of them were paying far too high dividends relative to what they could afford.”

Ross Mathison, manager of the Baillie Gifford Responsible Global Equity Income fund, shared the same concerns about dividend yields being too high in some UK companies.

He said some businesses ramp up dividends to attract investors when that capital could be put to better use if re-invested back into the company.

Mathison added: “In the UK market, income is dominated by companies whose earnings go through boom-and-bust cycles driven by factors beyond management’s control, such as big oil, or companies that are over-distributing and using a high dividend pay-out as the main tool to attract investors.”

Since launching in 2018, his £1bn fund has slashed its UK exposure by more than half, dropping from 15.1% to 6.6%.

Good income opportunities still appear in the UK, but Mathison said that “the ability to sustainably compound earnings and dividends for the next decade requires us to be highly selective”.

There may be reason to be cautious around the UK’s high-yielders, but there are still benefits to holding some of the big dividend payers, according to Fitzpartick.

British American Tobacco (BAT) is a top holding in Murray International, accounting for 2% of the trust’s assets. Its 6.98% yield makes it one of highest payers in the UK.

Although it has less room for dividend growth than some of its peers, holdings a company with such a high yield gives investors the freedom to buy developing companies with smaller pay-outs.

Fitzpartick said: “When you’ve got a company like that, which has consistently paid a really high dividend over many years, it means that you can then go into other types of companies that are at an earlier stage of their dividend paying journey.”

Indeed, investors who are heavily invested in the UK and want exposure to its big dividend payers would benefit from expanding their horizon, according to James Harries, manager of the Securities Trust of Scotland.

He said: “I have been making the argument for why it makes sense for investors to take a more global approach, to compliment their UK investments owing to a broader opportunity set.

“These include greater diversification and access to higher quality businesses and more dynamic economies such as the US.”

Even so, Harries has taken advantage of weakening sentiment towards the region and boosted UK exposure within the Securities Trust of Scotland to an all-time high of 30%.

Ultimately, investors should leave behind the idea that the UK is the prime market for income investors and stretch their horizon globally, according to Stout.

He said: “Older people would probably still have the perception that the UK is safer and it’s got a monopoly on yield, but if you speak to younger people, they’re more likely to say that you can get yield elsewhere, you can get growth elsewhere and you don't have to be in the UK to run an income fund.”

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